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Abe Missing Outside Director Pledge Risks Japan Growth Strategy

Corporate governance in Japan
About 90 percent of countries in which global investors trade equities have some form of corporate governance code, but Japan has none, according to Nicholas Benes, from The Board Director Training Institute of Japan. Photographer: Kiyoshi Ota/Bloomberg

Japanese Prime Minister Shinzo Abe is backing away from his pledge to require companies to name outside directors, a move that could curtail the investment needed to boost growth after three recessions in five years.

New rules will only require companies to justify the lack of outside directors without forcing them to appoint any independent board members, according to a draft document prepared by the Justice Ministry that was obtained yesterday from an official of Abe’s Liberal Democratic Party. The plan will prevent executives at parent companies from being counted as outside directors of their units, the document says.

The proposal falls short of Abe’s push to require companies to have at least one outside director as stated in the government’s growth plan, which includes reforms that seek to double foreign direct investment in Japan to 35 trillion yen ($358 billion) by 2020. About 90 percent of countries in which global investors trade equities have some form of corporate governance code, but Japan has none, according to Nicholas Benes, from The Board Director Training Institute of Japan.

“Those who bet on him being a transformation agent are going to be disappointed,” said Robert Dujarric, director of the Institute of Contemporary Asian Studies at Temple University’s Tokyo campus. “Abe on the one hand has liberal ideas, but he’s a product of the LDP. I don’t think he really wants to rock the boat on this.”

Cerberus Failure

More than 20 companies in Japan’s Nikkei 225 Stock Average lack outside directors, according to data compiled by Bloomberg. Canon Inc., the world’s biggest camera maker, and Isuzu Motors Ltd., Japan’s largest maker of trucks, have no non-executive directors, according to the data.

Coutts & Co., the wealth management unit of Royal Bank of Scotland Group Plc, is cutting holdings of Japanese shares on concern the government won’t pass the structural reforms needed to boost the economy.

Coutts shifted from overweight to neutral on the best-performing equities market among developed countries this year on signs Abe will squander the early decisiveness of Bank of Japan Governor Haruhiko Kuroda in tackling deflation, said Gary Dugan, chief investment officer for Asia and the Middle East. With a sales-tax increase approaching in April, Abe is failing to deliver on reform measures that would ease the burden of the levy, Dugan said.

‘Veering Off Target’

“The ‘third arrow’ of Prime Minister Abe’s recovery plan appears to be veering off target,” Dugan said by phone from Singapore on Oct. 18. Coutts, the U.K. company founded in 1692, managed 33.1 billion pounds ($53.8 billion) of assets as of June 30. “On the government side, things are just slipping. The worry is that Japan is controlled by pressure groups.”

Cerberus Capital Management LP, the biggest shareholder of Seibu Holdings Inc., was unable to get its representatives appointed to the Japanese hotel and rail operator’s board earlier this year, highlighting the challenges overseas investors face in the world’s third-biggest economy.

The push by Cerberus follows previous failures to gain representation in Japan by T. Boone Pickens in the 1990s, Christopher Cooper-Hohn’s Children’s Investment Fund Management UK LLP in 2008 and Warren Lichtenstein’s Steel Partners in 2010.

Olympus Corp. executives were found guilty earlier this year of aiding a $1.7 billion accounting fraud that “destroyed the image of Japanese companies internationally,” according to former Chairman Tsuyoshi Kikukawa, who received a suspended sentence for his role in the scandal. Shares of Olympus tumbled as much as 77 percent after former President Michael Woodford revealed the fraud.

“It sounds like what’s being offered is not much more than what the Democratic Party of Japan came up with,” said Benes, a representative director at the institute, which trains executives in corporate governance.

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