”Proposals for Raising Productivity in Japan” (by Nicholas Benes)

This is an English translation of a presentation in Japanese that I have given recently to several influential members of the government. The opinions are my own.

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“The main reason why the Japanese economy is sluggish is because Japanese companies do not withdraw from unprofitable operations and/or engage in sufficient industry consolidation, and as a result corporate assets are not reallocated to their best uses.

⇒  To resolve this requires the following:

A. Further enhancing corporate governance, and pension governance

Further strengthen corporate governance, mainly through the ongoing review of the Corporate Governance code (see 1 below)

Improve the governance of pension funds via a number of measures (see 2 below)

B. Eliminating rigidities in the labor market

Create the new employment classification of “Type 2 regular employees” (see 3 below)

1. Further Strengthening Corporate governance

a. Create a formal framework that requires the government and TSE to engage in ongoing follow-up on the Corporate Governance Code, and/or the principles in it

•  Following the example of Germany, which improved corporate governance by introducing a corporate governance code, the government should evaluate the  Corporate Governance Code every year and revise it on an ongoing basis.

⇒ Formally establish a permanent specialized organization composed of a reasonable (not too large) number of experts and market participants to inspect the Corporate Governance Code and make recommendations

• Items that should be added to Corporate Governance Code:

⇒Include in the governance code: companies should establish an “advisory committee of independent outside directors” to advise the board on matters where managerial self-interest may diverge from the interests of the company

⇒Require disclosure of all compensation that has been paid to any former board members (e.g., those who become consultants and advisors after they resign)

b. Issues that need to be improved through legislative amendment, etc.

• Provide an environment that facilitates more effective, interactive shareholders meetings, suitable for the age of engagement

⇒Make fundamental revisions [to legislation, etc.] to finally resolve the problem that many shareholders meetings are held on the same day or in the same week (the AGM “concentration” problem)

⇒Promote the creation of a framework to encourage companies to hold interactive (and real-time) shareholders meetings in this era of the Internet and smart-phones.  Right now, shareholder votes that occur at the AGM itself, are not even counted

• Enhance the executive officer framework

⇒ Commence initiatives to abolish the present “executive officer” system which has no basis in the Company Law, in which “executive officers” are legally no different from employees, and are protected from being fired by the labor law

2. Improving the Governance of Pension funds

• Improve the governance of pension funds so that this sleeping giant (pension fund money invested in equities) can be fully utilized.

⇒Create a way to pursue the personal responsibility of directors of pension funds and others (i.e., make it possible for pension fund beneficiaries to sue them for violations of their fiduciary duty of due care)

⇒Formulate criteria for the specialized knowledge required of directors of pension funds and others in the pension fund investment chain (e.g., fund managers)

⇒Promote signing of the Stewardship Code by pension funds

⇒In addition to requiring pension funds (or their fund managers) to diligently exercise their voting rights, make it mandatory that the records of the exercise of those voting rights (at the AGMs of individual portfolio companies and by agenda item) be disclosed

⇒Have  the Government Pension Investment Fund (GPIF) clearly state its support of the corporate governance code

• The Stewardship Code should be evaluated every year and revised on an ongoing basis, to make sure it is functioning effectively

3. Creating a “Type 2” Regular Employee Category

• A new “Type 2” regular employee labor contract should be introduced. This would be seishain employment contract where there is no fixed (i.e. no limited) period of employment and the employee can be fired if paid severance compensation based on the number of years of employment at the company.

• Merits of the Type 2 regular employee labor contract:

⇒It would make it easier for corporations to hire employees, including women and young people

⇒There would be incentives for companies to invest in personnel development and training that leads to increased productivity and job stability, because the employee does not have to leave in three years

⇒It would make it easier for companies to withdraw from unprofitable businesses and to reallocate their corporate assets.⇒It would help resolve the issue of skill mismatches

What foreign-affiliated firms and overseas investors are most hoping for, is for the rigidities in Japan’s labor market to be eased.

General Issues

To promote reform –

• Continue to eliminate factors that hinder reform

⇒Parties who insist on their vested interests

⇒Bureaucratic sectionalism (Ministry of Health, Labor and Welfare vs. Financial Services Agency vs. METI)

• We need to develop policies without influence from past politics or traditional “client” relationships [of bureaucrats]

⇒Promote policy-making based solely on an objective analysis of the data

⇒In addition to developing a system that expands the use of outside specialists and eliminates interference from bureaucrats who seek benefits for their own ministry, have outside specialists engage in responsible work by paying them proper compensation

⇒Set clear policy direction at the initial stages, through political leadership that does not involve bureaucrats

⇒Create a neutral think tank that is independent from the government to support the Cabinet Office and have the think tank not just analyze data, but also independently create concrete policies”

(Posted by Nicholas Benes.  Opinions are my own.)

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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