ICGN Conference, Tokyo, March 2014; Hosted by Tokyo Stock Exchange & Japan Exchange Group;Endorsed by Financial Services Agency, Ministry of Justice & Ministry of Economic Trade and Industry
‘Building a common language: a new era for company and shareholder dialogue’ (Download full Summary:http://bdti.mastertree.jp/f/1ywnb57c )
Opening keynote address
Yasuchika Hasegawa, Chairman, Keizai Doyukai, President & CEO, Takeda Pharmaceutical Company, Japan
Japan’s economy is under a transformation. The population is aging and the global business environment is becoming more competitive. Meanwhile, the Abe administration is implementing a series of reforms that will pull the economy out of 15 years of deflation. As part of this transformation, Japan must improve its corporate governance. Better governance is necessary for businesses to become more competitive and investor friendly. I expect several improvements to come as a result of the Abe administration as well as from the efforts of businesses and business groups’ such as the Japan Association of Corporate Executives (JACE), of which I am a Chairman.
The key question before us is how to improve governance in a way that capitalises on Japan’s strengths whilst also highlighting its weaknesses. One of the strengths of corporate governance in Japan is that it allows us to manage our companies for the long-term. This is partly because the Japanese institutional investors tend to have longer-term investment strategies, and partly because cross-shareholdings and other mechanisms of Japanese corporate governance shield managers from the pressure of short-term profit increases.
The number of Japanese businesses’ held by overseas investors is growing. There have been increased calls for Japan’s corporate governance system to match more closely that of the United States and Europe, for example, many have called for increased attention to the return on equity measure, which has been historically low for Japanese companies. In fact, this metric is included in the new JPX-Nikkei 400 stock index. The argument is that a company’s priorities should be more closely aligned with that of the shareholders. Whilst shareholders are critical to the success of a company, we must also recognise the needs of all our stakeholders.
The corporate governance system in Japan has many weaknesses. If we compare the diversity of our boards to those of other developed countries, Japanese governance falls short. If we consider ethnicity, only 3% Japanese directors are non Japanese, while the comparable figure is 9% in the United States. In addition, Japan’s corporate boardrooms do not include sufficient numbers of external directors. In comparison, both the New York Stock Exchange and NASDAQ Stock Exchange mandate that a majority of companies’ directors be independent and external.
Another voice missing from the Japanese boardroom is that of women. According to the Spencer Stuart Board Index, only 2.4% of the directors of Japan’s top 100companies are women. This is compared to 17% in the United States and 22% in France. In fact, in 2013, Japan ranked very low at 105th place in the World Economic Forum’s Gender Gap Report, and this was largely due to the low participation rate of women in the workforce. A diverse range of viewpoints is critical to innovation. A diverse board has more varied experience, and this experience can help identify new possibilities and continued innovation.
I expect that the upcoming reforms will improve corporate governance in three ways. First, the number of external directors on Japan’s boards will be increased. Second, the number of women in the corporate boardroom will be increased and third, institutional investors will be encouraged to play a larger role in corporate governance.
However, to accomplish this, Japan needs to first improve the participation rate of women in the general workforce. The Abe administration’s goal is to increase the participation rate from the current 68% to 73% by the year 2020. The Abe administration has taken one concrete step towards this direction by deciding to expand the day care programme to accommodate all children by 2017 thereby, helping mothers return to work after having children.
It is also important that women move forwards in their careers. For this reason, JACE has proposed that Japan set a target where women represent 30% of all managers by 2020. We recommend that each company’s current figures be made public in IR and the CSR reports. Additionally, we have begun setting up the development programme for female managers and executives. Many Japanese companies are now proactively setting up Leadership Teams that include women leaders.
The numbers of external directors is likely to increase because of incoming revisions to the Companies Act which has adopted a comply-or-explain approach to encourage companies to adopt external directors. Realistically, it is not so easy to bring external directors into Japanese companies. The main for this is because there are insufficient numbers of candidates with the right experience. Even when there are potential candidates, there is no easy way for the leaders of Japanese companies to find them. As a solution, JACE has set up an introduction system in an effort to introduce the right people to the right companies. Together, the Abe administration reforms and JACE will assist with increasing the numbers of external directors.
Another change I expect is for institutional investors to play a larger role. The Abe administration will implement the Japanese version of the UK stewardship code. This set of principles for investors was originally put in place in 2010 after the financial crisis in the UK. The Japanese version will also consist of a set of principles that lay out the responsibilities of institutional investors. The code will use a comply-or-explain system to encourage investors to have closer relationships with corporate managers. This allows investors to only implement those principles that are appropriate to their situation. According to these principles, institutional investors should pay close attention to the activities of the companies they invest in, write clear guidelines for their investment voting policies and also disclose their voting records.
Good corporate governance is about balancing the concerns of the businesses’ many stakeholders, shareholders and management. The key question before us is how to improve corporate governance without losing the unique strengths of the Japanese system. The solution to this balancing act lies in building a better relationship between these two groups. One simple way to accomplish this is for management to proactively reach out to shareholders. In order to understand and address their concerns, managers would benefit from the ideas and businessrecommendations that shareholders can bring. Governance regulations that encourage a dialogue and protect the interests of both parties can help make this happen. By increasing the number of external directors on boards and establishing the stewardship code to help shareholders engage with businesses they invest in, we’re likely to see better dialogue and stronger corporate governance in the future. Stronger governance will lead to more efficient and competitive Japanese companies as well as to improve the growth and productivity of Japan.
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