The Japanese government's newfound embrace of international corporate governance standards has the potential to be an epochal moment for the country's economy. Shareholders are now being encouraged to challenge Japanese CEOs, and companies across the country find themselves under pressure to diversify their boards and increase accountability.
There's just one problem: Japan's biggest companies are greeting these reforms with a halfhearted shrug.
When it comes to corporate governance, Takata, Toshiba, Sharp and Toyota are still acting as if it's 1985. Deadly airbag maker Takata is as opaque as ever in its dealings with the public. Toshiba is avoiding any admissions about its growing accounting scandal. Sharp is refusing to exit money-losing businesses, angling for government aid instead. Toyota is hawking new shares that can’t be sold for five years, the better to resist the demands of shareholders. And you can now include Honda, Japan Tobacco and even the operator of the Nikkei stock exchange on the list of recalcitrant Japanese corporations.
Honda has been in need of new leadership since Takanobu Ito resigned as CEO in February in the wake of an international safety scandal that claimed the lives of as many as seven people (thanks to Takata's faulty airbags). Yet Honda revealed Monday that its new leader will be a 33-year company veteran, upholding a 41-year custom of leaders hand-picking their successors from within the company -- the same insular practice that drove Japan's tech giants into the ground in prior decades.
Japan's Ministry of Finance is also failing to uphold Prime Minister Shinzo Abe's vision of a transformed corporate landscape. This week, the ministry announced it is scrapping its previously announced plans to sell its holdings in Japan Tobacco, Asia’s biggest listed cigarette maker, to fund the restoration of earthquake-ravaged communities and halt radiation leaks at Fukushima. Even as Abe talks of making corporate Japan more transparent, his own government has still been making massive economic decisions behind closed doors.
And then there's Japan Exchange. For years, Japan's law enforcement and corporate establishment tolerated companies leaking earnings guidance to the media, which enabled insiders to reap enormous profits in trading -- a practice that, if it happened on Wall Street, would quickly earn the attention of the FBI. Yet, two weeks into Japan's supposedly-epochal corporate governance push, Japan Exchange CEO Atsushi Saito has made it clear he sees no reason to change. "Personally I don’t think it’s unfair," Saito somehow told reporters this week with a straight face.
All three examples show how Abe's new initiatives are no match for Japan's traditional "iron triangle" -- the clubby nexus of elected officials, bureaucrats and CEOs that has long dominated Japan's economy and resisted any prime minister who dared challenge them.
That's not to say change isn't afoot. Aside from nudging corporate boards to add more outsiders and women, Abe's new regulations have forced companies to disclose their policies on cross-shareholdings and the exercise of shareholder voting rights. And it's a sign of progress that Japan Exchange recently declared it is "ashamed" at Toshiba's accounting scandal.
But that admonishment also underscores how much more needs to be done. Japan Exchange has no excuse for keeping Toshiba on the list of JPX-Nikkei Index 400, its list of role-model companies. Japanese regulators should be pouncing, too, demanding to see Toshiba's books requiring management do more to investigate the scandal than name a hand-picked "third-party committee," the oldest of corporate Japan's obfuscating gimmicks.
The same stringent approach should apply to any other corporate icon ignoring the Japanese government's reform efforts. We'll soon know whether Honda is among them. When the company announced the appointment of its new CEO, Takahiro Hachigo, it had many industry observers Googling "Hachigo" and hoping for the best. To impress investors, he must, at the very least, sever the automaker's more than 50-year relationship with Takata. But, in a corporate culture that has tended to prize relationships more than return on investment, will he have the fortitude to do so?
The first step will be to acknowledge the urgency of the problem. If Hachigo and his fellow Japanese CEOs can't make real progress when it comes to corporate accountability, it's hard to see how Japan can sustain its 35 percent stock market rally over the past 12 months. As Japan has learned all too painfully before, bubbles don't last forever.
(Corrects source of leaks from the Japan Exchange in 6th paragraph.)
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