It's been a dreadful week for Japanese corporations. Toshiba is facing questions about its accounting practices, Sharp is asking lenders for another bailout and Takata can't escape bad news about its airbags.
Each of these problems is bad enough on its own. Together, they raise serious questions about the state of Japan's corporate governance. And at a time when the Nikkei stock exchange has been rising (it's up 36 percent over the past year), those questions are in urgent need of answers. If Japan's leading companies are managed as poorly as this past week's events suggest, there's little reason to believe the country's stock market surge is sustainable.
Prime Minister Shinzo Abe has certainly tried to improve Japan's corporate governance. Last year, Tokyo introduced a stewardship code encouraging investors to pressure underperforming CEOs, and launched an index of 400 domestic companies that regulators believe use their cash stockpiles well. Next month it will release a national code of conduct for executives: Companies will be asked to include at least two outside directors on their boards or explain why they shouldn't have to. Abe is also asking companies to invite more women into the executive suite. Diversity in the boardroom, the government hopes, will enhance oversight.
In theory, says Nicholas Smith, Tokyo-based strategist at CLSA, "this should trigger a flurry of fevered business and balance sheet restructuring." In practice, corporate Japan has barely budged in response to Abe's reforms -- after decades of running their affairs free of outside interference, their inertia has proven too powerful.
Take Toshiba, which yesterday estimated it will write down $420 million of profit over three years in response to an ongoing internal accounting probe that revealed the company has overstated its profits. Financial markets seemed relieved, but investors should be asking themselves two questions: How could such massive accounting irregularities still happen almost 14 years after Enron's implosion and four years after the $1.7 billion Olympus fraud scandal? And how have Japanese authorities responded to the revelations of Toshiba's malfeasance?
Bloomberg Intelligence analyst Gregory Elders tackled the first question in a May 12 report titled "Toshiba May Awaken Olympus Accounting Concerns in Insider Japan." As Elders points out, Toshiba's board has a number of so-called insider directors who have worked for the company for an average of 38 years. Toshiba's poor accounting, he argues, "highlights how insider boards may struggle to challenge management." Rather than asking companies to bring on more outsiders, as Abe has done, Tokyo should mandate they do so, with penalties to ensure enforcement.
As for how Tokyo has responded to the revelations about Toshiba -- it has barely done anything. There have been no investigations of the company, no public chastisement, no parliamentary hearings. Toshiba has even kept its place on the JPX Nikkei-400 index, which is supposed to list the country's best-run companies.
Sharp, meanwhile, proved this week that it's a zombie company with no path to growth. The debt-saddled company posted a $1.9 billion loss in the year that ended March 31. And the company only has itself to blame. Once synonymous with cutting-edge electronics, Sharp's moves to diversify into software and content businesses have been glacial. Little has changed at the company since 2012, when the company was saved from the brink of bankruptcy by indulgent lenders.
Now, Sharp is back, hat-in-hand, asking for more help. And all it is offering in return is a business plan riddled with gimmicks like reducing capital to cut tax payments. By any account, Sharp is the type of company that should be allowed to fail. Instead, weak oversight allowed management to run the company into the ground.
Takata, for its part, has managed to combine Toshiba's lack of transparency with Sharp's chronic complacency. This week, Toyota, Nissan and Honda said they're recalling at least 6.5 million vehicles because of faulty air bags supplied by Takata that can endanger passengers by emitting shrapnel. Those recalls might have occurred much sooner had Takata not needlessly released information about its products in small drips. Even with passenger safety at stake, company executives haven't offered their full knowledge to the public. (When the U.S. Senate held airbag-safety hearings last November, company chairman Shigehisa Takada, grandson of the company's founder, refused to appear.)
Takata's reticence has caused massive problems for automakers. "They can’t recall all the possible cars without knowing what the direct cause is as the costs are enormous and they don’t know which side should cover the costs," explains Tokyo-based researcher Takeshi Miyao of Carnorama. This is a situation where the government should find ways of compelling Takata to be more forthright. But there's no signal that the government is inclined to make any such effort.
In that sense, this wasn't just a bad week for corporate Japan. It was a bad week for the Japanese government. It should finally recognize that its efforts at corporate reform are falling far short of the mark.
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