“What They Do With Your Money: How the Financial System Fails Us and How to Fix It”

Based on the theory that responsible behavior by institutional investors hinges in turn on stimulating a population of active citizen investors, I am attaching two of my recent articles drawn from the new book “What They Do With Your Money: How the Financial System Fails Us and How to Fix It”, by Jon Lukomnik, David Pitt-Watson and me (Yale University Press, just out). The official book launch took place on June 7.

The first article, published on the Harvard Law CG blog, sets out the costs to society and individuals when citizen investors are missing in action, and offers several proposed fixes:

The Canadian Business Journal: “Japanese Corporate Governance Codes in Global Investors Spotlight”

”NEW YORK, NY–(Marketwired – May 31, 2016) – Institutional Investor, a world leading financial information company founded in 1967, is pleased to announce the results of the 2016 rankings of Japan’s top CEOs, CFOs, Investor Relations Officers and Investor Relations Departments. Institutional Investor’s CEO, David Antin, is the founder of the Executive Team rankings, which are supported by deep data and have become a key benchmark globally. This year, 443 Japanese companies received nominations across 25 business sectors. Corporate governance proved a key factor in determining the winners.

Citywire: ”Japanese value is not dependent on a weak yen”

”The Japanese equity market has been under pressure recently from a strengthening currency, a weakening global economy and the uncertainty caused by the Bank of Japan’s introduction in late January of a negative interest rate policy. We recognise these concerns, but think that the fears of many market participants are overdone.

As value investors we still see Japan as a fertile hunting ground.

A far greater percentage of listed companies have net cash on their balance sheets in Japan than in any other major market and net cash represents a greater percentage of market capitalisation, as shown below. Furthermore, many of those companies have significant unrealised gains on real estate holdings; and many have large holdings of listed equities, some for strategic business purposes, but some for no reason other than historic relationships.

The question that has occupied the minds of value investors like us has been how that value can be unlocked, used more efficiently and returned to investors when not needed for operational purposes. In that regard, we think that 2015 was a pivotal year for listed Japanese companies.

Prof. Osugi: ”Corporate Governance – No Longer Somebody Else’s Problem”

An article by BDTI’s Representative Director Professor Kenichi Osugi:

”1. Introduction

Up until very recently, discussion of corporate governance was only relevant to certain academics and the IR representatives of listed companies. However, since the Japanese government cited improvements to corporate governance as being a part of its “Abenomics” policy, corporate governance has become a broad-reaching topic that cannot be ignored by listed companies and their executives. Specifically, organizations such as the Financial Services Agency and Tokyo Stock Exchange have formulated the ”Stewardship Code” (February 2014) and the  ”Corporate Governance Code” (June 2015), and listed companies and institutional investors were forced to respond to these codes of conduct………”

Sonoko Noda and Nobuhiro Sato: ”Japan’s rate of independent directors is one of world’s lowest”


Last year, Japan introduced codes designed to work together to increase corporate value and investor return in Japanese companies. The Corporate Governance Code and the Stewardship Code are supposed to work hand-in-hand to promote transparency and sustainable growth. Part of the Corporate Governance Code calls for companies to have at least two independent directors. Having outsiders on board, it was hoped would bring discipline as companies reach for higher profits.

VIDEO – ”Assessing Abe’s Third Arrow: Corporate Governance Reform in Japan”


”As doubts persist about the progress of Prime Minister Shinzo Abe’s “third arrow” structural reforms to lift the Japanese economy, corporate governance is one area where change has been visible over the past three years: a new Stewardship Code for institutional investors, a Corporate Governance Code for companies themselves, a new JPX-Nikkei 400 index with minimum ROE and independent director requirements for inclusion, and efforts to increase the number of women on corporate boards and in senior management. How will these changes affect the performance of Japanese companies? What are the implications for the Japanese economy and for the success of Abenomics? What more could be done? As part of our continuing examination of major trends in the world’s third-largest economy, the CSIS Simon Chair will host experts from government, business, and academia to discuss Japan’s recent corporate governance reforms………..”

ACGA’s Feedback to FSA on Japan’s Governance Code: Training by Specialist Providers Important

”………Experience shows that the implementation and evolution of “comply and explain” can take a long time to develop, but there are opportunities to accelerate this transition. The Follow-up Council may wish to consider how to guide and assist Japanese listed companies and domestic institutional investors to understand and implement good disclosure. For example, the Council could advise the FSA to do the following:

WSJ (Benes) – ”Japan’s Pension Funds Could Help Curb Cash Hoarding”

”Almost three years after I first proposed in these pages that Japan adopt a governance code to raise productivity, the country now not only has a Corporate Governance Code but also a Stewardship Code for institutional investors. There has since been much discussion, and even exhortation by the government, about the urgent need to change the corporate mindset, engage with investors and increase companies’ return on equity. These are all major achievements. But when it comes to increasing corporate profitability through reinvesting in the real economy, there is still much progress to be made.

Japanese companies continue to sit on a mountain of excess cash. According to Japan’s Ministry of Finance, this mountain actually grew to $1.5 trillion in 2015 from $1.4 trillion in 2011, despite substantial increases in dividends and stock buybacks. During that same period, capital expenditure shrank by more than half……….”

”How the ESG landscape is changing in Japan” – A participant’s personal observation of RI Asia 2016

  ”RI Asia 2016 took place at the Tokyo Stock Exchange on the 23-24th February, and was attended by approximately 400 domestic and international participants. As an ex-resident of London now based in Tokyo, it has been interesting to observe the changingESG landscape in Japan. RI Asia acted as a useful milestone to stop, reflect […]