“Japan’s Reforms Push Companies to Unlock Cash”

by Jean-Christophe de Swaan – Decades from now, if Abenomics turns out to be successful, economic historians will probably pinpoint Japanese prime minister Shinzo Abe’s corporate sector initiatives of 2014-15 as the era’s seminal reforms.

This set of self-reinforcing changes is fast gathering pace in pressuring corporate leaders to unlock their dormant cash. Few initiatives could be more effective in revitalising Japan’s economy.

The reforms are undervalued. Corporate governance reforms generally tend to be looked upon as peripheral to a government’s central policy thrust. Foreign investors have also lost interest in Abenomics, having seen the consumption tax rise erode growth and the initial laundry list of “Third Arrow” restructuring reforms peter out.

Rather than mandating change, Mr Abe’s corporate reforms forcefully nudge companies to focus on their capital efficiency by deploying one of the most effective tools in Japanese society — the threat to become, as the Japanese saying goes, the proverbial nail that sticks out and ends up being hammered.
The latest initiative, a new corporate governance code finalised on March 5, urges companies to engage with their outside shareholders, take on at least two independent board directors, and reconsider their cross shareholdings and anti-takeover measures. They can choose not to follow that advice, but will have to explain in detail why they are continuing to adopt policies the government is actively discouraging.

Mr Abe’s corporate initiatives are all the more effective because of their complementary nature. The corporate governance code’s sister initiative, the stewardship code, asks institutional investors to engage with their portfolio companies, in a clear departure from the longstanding principle espoused by Japanese society that outsiders should not interfere.

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