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As the person who initially proposed the Corporate Governance Code to the LDP in 2013 and 2014, I am well aware of its limitations in various areas. For this reason, I am very pleased that Fair M&A Study Group have decided that its discussions should cover not only MBOs, but also ”cases which are likewise significantly affected by the issues of conflict of interest and information asymmetry”[1], including “cases of acquisition of a controlled company by its controlling shareholder.”[2]
This indeed an important mission, because these topics include virtually all types of M&A transactions and the public statements of executives and boards with regard to them. For many years in the post-war era, the failure of the government and the JPX/TSE to set forth clear bright-line rules that facilitate a fair, robust M&A market in Japan has stunted productivity, dynamism and growth in the Japanese economy.
NOTE: This public comment supersedes and replaces the one that I, Nicholas Benes, submitted on January 12, 2019)
As the person who initially proposed the Corporate Governance Code to the LDP in 2013 and 2014, and suggested a number of principles in it, I am well aware of its limitations in various areas and the fact that Japan has not yet attained the quality level for an equity market that is expected by global investors. In this sense I am very pleased that the JPX has decided to review its equity market structure and related standards.
Challenges and Realities
This indeed an important mission, for which is it essential to recognize and discuss the impact of a number of challenges that Japan faces in improving governance, efficiency, and trustworthiness of its equity capital markets. These challenges include:
(As submitted to the JPX on January 12, 2019)
There should be only two sections of the JPX: (1) a TSE Premium Section and (2) an Emerging Companies Section.
Listing on the Premium Section should have the following requirements in addition to the existing TSE1 listing criteria:
(a) a five-year average market capitalization exceeding 50 Billion yen; (b) the ratio of total “policy holding stocks” (seisakuhoyukabu, 政策保有株) to [net assets less cash equivalents（純資産ー現金等）] as of the most recent FYE “yuho” financial report (or the one submitted just after any AGM) must not be more than 15%（10% in 2022, and 5% in 2024); (c) use of the electronic voting platform; (d) convocation notices must be sent out by both post and electronic methods at least four weeks before each AGM; (e) production of financial reports, kessan tanshin, corporate governance reports, convocation notices, and jigyou hokokusho in both Japanese and English, in all cases using XBRL formats using the same XBRL tags as those used for the respective Japanese materials…
Mr. Ghosn and Nissan are charged with misrepresentation of securities reports. The Financial Instruments and Exchange Act provides for civil liability as well as criminal liability for acts of misrepresentation of securities. Nissan will face a civil lawsuit seeking damages from investors in no distant future. One of the issues that will be argued in civil lawsuits […]
Abstract: “This study examines whether the sustained lower profitability and market valuation of Japanese firms compared to global peer firms can be explained by the structure of insider dominate board of directors and the employment system which hinders flexible employment adjustments by using cross-country data. Firstly we show that level of outside director ratio and flexibility of employment adjustment both differ consistently across 27 countries in the analyzed period. We show that these two factors significantly explain observed variation of financial performance across countries significantly. In addition, we show that not only do these two factors have significant explanation power over the relatively poor performance of Japanese firms, but also over the better financial performance and growth rate of US firms. ”
Authors: ARIKAWA Yasuhiro (Waseda University) / INOUE Kotaro (Tokyo Institute of Technology) / SAITO Takuji (Keio University)
Download the paper: “Corporate Governance, Employment, and Financial Performance of Japanese firms: A cross-country analysis”
Related page on RIETI web site: https://www.rieti.go.jp/en/publications/summary/18120006.html
Amid the hoopla about Nissan and other scandals, NOT ONE of the major Japanese asset managers on this list have supported non-profit BDTI in its mission to improve governance in Japan via training and analysis of governance practices, at any time over the past nine years. Some of the foreign asset managers have supported us (thanks!), but none of the domestics. ESG is the fad of the month here in Japan, but mainly as a PR line to use in gathering AUM, it seems to me.
On November 22nd, BDTI held its English Director Boot Camp , attended by a number of highly experienced participants. Participants from various companies heard lectures about corporate governance by Nicholas Benes, and exchanged experiences and opinions at a spacious, comfortable room kindly donated for our use by Cosmo Public Relations, a leading communications and PR firm in Tokyo.
As you might imagine I have been besieged by inquiries from the press when I have little knowledge of what is going on, or went on, a Nissan. I also received this spontaneous email from a friend who is concerned about the Nissan-Ghosn affair. Having “sanitized” it, with permission I am posting it. This particular person worked in matters related to legal compliance for 10 years at a major Japanese company.
Dear Mr Benes:
I retired nine months ago ago and after a long vacation, recently I have finally got around to looking for an outside director or other similar position.
Anyway, I wanted to write because I was floored by the whole Ghosn spectacle. I am not close to that company, but was astounded that they chose to turn over and have arrested two foreign senior staff (Chairman and his aide) for redirecting assets to his own account “over several years.” I was floored because:
a) Neither of them is likely that spiffy at Japanese and would need other staff to prepare the transactions for them. Indeed even had they been Japanese staff themselves this would have required a certain amount of nemawashi at least the way the companies I am familiar with are now run. Gone are the days when 10,000 here and 100,000 there can be disbursed at some executive’s personal discretion…..
By Ken Hokugo[2]
Director, Head of Corporate Governance, Pension Fund Association
Director, The Board Director Training Institute of Japan
There has always been confusion surrounding this topic. From the point of view of those who want to help foreign investors understand the realities of the Japanese market, the most troubling number that is thrown about is the seemingly magic number of “10% or less”. This number is frequently referred to by the media, with the source given as being the reports by a certain analyst at a research institute that is affiliated with a prominent securities firm.
Quite often, we encounter foreign investors who casually believe this widely-touted number of “10% or less” and therefore are not concerned very much (if at all) with the issue of “cross-shareholdings” in Japan, in light of recent improvements in Japan’s corporate governance. Needless to say, it takes a lot of energy to convince such investors that the reality of the Japanese market is different. In this post, I am not trying to scare foreign investors away from Japan’s stock markets, but rather trying to encourage them to invest based on an accurate understanding of the situation in the context of history, culture, and the overall current environment.