Wharton Business School in 2007 published an article comparing the Anglo-American system of corporate governance with that of Japan. In the U.S. and U.K., according to the article, corporate governance is concerned with ensuring that the firm is run in the interest of shareholders. Its objective is to create shareholder value through application of Adam Smith’s invisible hand. Resources are presumed to be efficiently allocated as firms attempt to maximize the wealth of shareholders and as shareholders pursue their own self-interest by allocating funds to companies they think will maximize their returns. In Japan, on the other hand, governance takes into account a broader range of stakeholders including employees, suppliers, and customers.
Does Japan’s more collective orientation ensure society’s resources are used as efficiently as in the Anglo-Saxon model?
Nick Benes, Representative Director of The Board Director Training Institute of Japan (BDTI), thinks not. Benes holds a law degree, worked as an investment banker for eleven years (he sold Rockefeller Center when it was owned by the Japanese), and has been the director of several Japanese companies. He believes that if Japan is to more productively allocate its resources, firms will need to adopt certain features of the Anglo-Saxon corporate governance model.
Benes says capital markets are punishing Japanese firms for inefficient use of their capital. He notes the Tokyo Stock Exchange first-section price-to-book ratio trades below 1.0, less than half the average of developed nations (see link). “If investors will only pay less for your company than net assets, they are telling you that you’re a bad manager. They’re saying you’re not making value – you’re destroying it.”
In Japan, Benes suggests, there is a negative takeover premium for listed company shares. “Normally there is a takeover premium because there is option value in that more value might be extracted from the assets should the firm be sold.” Benes surmises, “Here, there is a reverse premium because nothing can ever force existing management to sell a company to someone who can do more with it.”
Part of the problem, according to Benes, is there are so few rules in Japan requiring or incentivizing firms to improve their corporate governance. “Most countries have some rule about director training and orientation, or the disclosure of it. They may not require policies for director training and/or orientation, but even then, they usually have principles about training in a “corporate governance code” set forth by the stock exchange, or rules requiring that you tell your investors about your policy, including the fact that you do not have any board training policy if that is the case. Japan has absolutely no rule about those things.”
The number of firms offering director training reflects that lack of policy. BDTI is almost alone in offering director training in Japan. In the U.S., however, there are over 300 training courses that were once listed as “acceptable” by ISS (a proxy advisory firm), and hundreds of others.
Benes notes, “The barber who cuts your hair took a test and has a license. The taxi driver did the same. But guys who run multi-billion dollar companies and that have huge personal responsibility are not required in Japan to know anything in particular. Most shocking, the people who are supposed to be the guard dogs of governance in Japan, the statutory auditors, are not required to know anything about the very topics that they ‘audit’ – law and accounting. Is that not strange?”
Japanese law also has a minimal requirement for outside representation on the boards of Tokyo Stock Exchange listed companies. Only one independent outside board member is required, and it can be a non-voting statutory auditor rather than a director. While the majority of board directors in the U.S. are independent outsiders, in Japan boards are dominated by insiders.
Changing Japanese law to have boards composed by a majority of independent outsiders, though, will not be sufficient to improve corporate governance, says Benes: “Even if the laws were to change (something he does not expect to happen any time soon) Japan would still have the same human capital problem because not enough people understand how to be good directors. All too often, directors who are supposed to execute the law properly don’t sufficiently understand their duties, the laws, or even the subjects that they oversee – finance, risk management, M&A transactions, the whistle-blower hotline, and like matters. Many can’t read financial statements at a sophisticated level.”
Benes also says that because Japanese employees are primarily developed using on-the-job training, there is much less of a “common toolkit” of knowledge at the board level than there is in the U.S., where many workers have MBAs. “Here, the person in charge of product development, sales, accounting, even the president – each person is in his own silo,” says Benes, adding, “He may not necessarily know much about the other areas. The way a board works in Japan, there is an unspoken rule that, ‘I will not talk much about your area, if you don’t talk much about mine – so let’s get this thing over with quickly.’ Silo thinking and lack of common toolkits doesn’t lead to good long-term thinking at the board level.”
There may be a silver lining. Benes notes Japan’s corporate law is actually very shareholder friendly: “That’s something many people don’t know. Japan’s company law is a lot more shareholder friendly than is Delaware’s. For instance, the U.S. does not give access to the proxy for shareholder proposals to nominate or terminate directors – in a country that prides itself on shareholder democracy! In Japan, there is very liberal access. You don’t even need many shares. Here, great possibility exists for much shareholder activism.”
Shareholder activism is on the rise. To learn more about shareholder activism in Japan, read Benes’s recently published viewpoint in the ACCJ Journal entitled “Shareholder Spring” here.
Nicholas Benes is Representative Director of The Board Director Training Institute of Japan and President of JTP Corporation. He is a Governor of the American Chamber of Commerce in Japan, where he is also Chair of the Growth Strategy Task Force and Vice Chair of the Labor Force Diversification Task Force. Previously he was an investment banker at J.P. Morgan in London and Japan. He has also served as an independent outside director at a number of Japanese companies, both listed and unlisted. In 2010, he was a member of the FSA’s Corporate Governance Liaison Committee. He is a graduate of Stanford University, holds an JD-MBA degree from UCLA, and is an inactive member of the bar in California and New York. bdti.or.jp