Remaking Japan Inc.
Japan is home to some of the world’s oldest, biggest and most successful companies. Here’s what’s less well-known: Many of them have been lousy investments. The same culture that spawned world-beating levels of education, social cohesion and workforce discipline created firms run more for the benefit of management and employees than for shareholders. Waves of activist investors — both Japanese and non-Japanese — tried to unlock the country’s riches. They failed. Prime Minister Shinzo Abe, taking aim at the cozy way Japan does business, has hoped to spur the activists on. Are attitudes changing at last?
The Abe administration’s prodding of companies to increase investor returns has come in the form of voluntary pacts on corporate governance practices. Modeled after similar measures in the U.K., the guidelines require every board of directors to include two members with no ties to the business and to justify any shareholdings in other companies. In 2016, almost half the companies in the benchmark Topix stock index surpassed the government’s target for an 8 percent return on equity. A separate set of government guidelines for investors is designed to make them more hands-on. There are signs these moves are paying off. Japanese companies will buy back the most shares on record in the year through March 2017, according to Goldman Sachs Group Inc. New York hedge fund manager Daniel Loeb continues to press for changes as an activist investor in Japanese companies. Loeb notched another victory in 2016, winning the resignation of the chief executive officer at Seven & i Holdings Co. after asking the retailer’s board to block promotion of the CEO’s son to the top post. Another sign shareholders have been emboldened: short-sellers including Well Investments and Carson Block’s Muddy Waters Capital LLC have targeted Japanese companies with bets on declines in share prices.
Japan’s economic expansion after World War II thrived on close-knit networks of manufacturers, suppliers, distributors and banks that often held each other’s shares. The system was supported by the government and became known as Japan Inc. Shareholders accepted the arrangement, leaving decisions to management and employees, whose loyalty was rewarded with jobs for life. When Japanese exporters dominated global industries in the 1980s, the setup was seen as a strategic advantage that liberated them from the pressure to boost profits each quarter. The model became a liability when the property and stock market bubble burst. Troubled companies were kept afloat and return on equity fell to half the global average. Shareholders determined to shake things up were frustrated. Texas oilman T. Boone Pickens was thwarted in a 1989 bid to win a seat on the board of a Toyota supplier. U.S. investment fund Steel Partners retreated from stakes in manufacturers of wigs, beer, sauce and candy after Chairman Warren Lichtenstein drew scorn for saying he needed to “educate” Japan’s managers about capitalism. Yoshiaki Murakami, a former Tokyo bureaucrat, failed in his attempt at the country’s first Japanese-led hostile takeover, in 2000.
Abe’s push for change shows that the drive to evolve Japan’s corporate culture is coming from the highest levels of government. Opinions are split on how effective it will be. Top-down tactics can tempt companies to take a box-ticking approach, so that they meet the guidelines but don’t alter their underlying mores. Many businesses are still protected by poison pills, legal instruments that can scupper hostile takeovers. Keidanren, Japan’s influential business lobby, opposed the requirement for more outside directors, arguing that each company should be free to determine its own structure. Its concerns about the new code were defused by an opt-out allowing firms to explain if they can’t comply. That’s expected to get more difficult the longer the guidelines are in place. A stock index created to show off companies that embrace the new approach and shame those that don’t generated average return on equity of 8.4 percent in the quarter ended in December, the highest since September 2015. Still, serial accounting missteps at Toshiba demonstrate how some of Japan’s biggest companies still seem to work by their own set of rules.
The Reference Shelf
- Shifting views of the country’s corporate culture were explored in Richard Katz’s 1998 book “Japan, The System That Soured: The Rise and Fall of the Japanese Economic Miracle.”
- The International Monetary Fund studied how much cash could be released from Japan’s companies in an August 2014 report.
- Guides to Japan’s corporate governance code from Bloomberg Intelligence, Institutional Shareholder Services and Jones Day.
First published July 31, 2015
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Grant Clark at firstname.lastname@example.org