NEW YORK — As if Japan’s corporate sector didn’t have problems with long-term economic deterioration and deflation, the stock market disaster and nonperforming loans, the U.S. Securities and Exchange Commission has added another headache. The issue at hand is the extent to which Japanese companies will have to comply with SEC regulations related to, among other things, the certification of the accuracy of financial reports and the appointment of outside directors.
Neither of these has been a burning issue in the discourse about corporate governance in Japan.
One Japanese company, Daiwa Securities, has canceled plans to list on the New York Stock Exchange, ostensibly because of disclosure requirements mandated by recent changes.
As a result of the Sarbanes-Oxley Act, CEOs and CFOs of nearly 1,000 major publicly owned companies were required by the SEC in August to certify the accuracy of corporate financial reports. Foreign-owned companies, however, were given a reprieve. Although it intended to do so, the SEC failed to provide guidance for non-U.S. companies by the time the law became effective. SEC Chairman Harvey Pitt then had to confront an irate Europe, whose existing systems are largely believed to be adequate.
Pitt’s resignation from the SEC will certainly delay the announcement of the new rules regarding foreign companies. The Japan Business Federation has made a strong case for exempting Japan from these regulations, and is prepared to keep up the fight. Japan and Europe now have more time to lobby for their interests.
The post-Enron reforms are a new challenge to Japanese globalism. The number of Japanese firms affected at present is low: The 30 that are listed on U.S. exchanges such as the NYSE and NASDAQ. The listings are in the form of U.S. depository receipts — packages of shares that are quoted in dollars. But these are among the most important, internationally oriented Japanese companies, and what they do will likely influence other firms. The new disclosure requirements may encourage some to delist or refrain from listing shares on U.S. exchanges.
And the matter of outside directors would be a problem. When asked about his parent company, Senior Vice President at Toyota North America James Olson replied: “You bet there would be a problem. Toyota’s board has 58 members. All of them are Japanese and all are insiders.”
Nationality is not an issue, but a forced increase in outside directors could certainly annoy Japanese companies. Specifically, the audit committee of a board will have to be made up of outside directors.
Related issues were also discussed a day before Olson’s presentation at a conference on corporate governance, sponsored by the Japanese Chamber of Commerce and Industry of New York. There, an official from the Ministry of Health and Welfare explained how governance was changing in Japan. Yasuhiro Fujii pointed out that the Council of Public Institutional Investors had been formed, corporate governance principles had been developed for public pension funds and, overall, interest had increased in the exercise of shareholder voting rights.
These represent efforts to comply with both domestic conditions and international trends. After all, as one participant emphasized, although corporate governance models are nation- and culture-specific, the competition for capital is global and investors worldwide have some common themes.
At the same time, these measures are expected to replace what has been lost in Japan’s traditional toolbox for corporate governance. Bruce E. Aronson, a lawyer who also spoke at the meeting, noted that the main-bank arrangement and strong keiretsu ties, as well as informal “window guidance,” used to have workable governing aspects, but have been in decline for some time now. It is obvious that this will become a trend with added momentum coming from action to dispose of Japan’s nonperforming banking loans.
There also is something to be said for the quality of work by inside directors. A New York compensation consultant recently suggested that, on average, outside directors devote two days to preparations for board meetings. This plus a collegial atmosphere and informal pressure on newcomers to observe the established way of proceeding are seen as operational reasons why outside director contributions in the United States may have limitations.
In Japan, there is a strong argument for looking overseas for clues on how to install and strengthen corporate governance. Even at the cost of a degree of autonomy, to run in the opposite direction of U.S. initiatives is to risk isolation. Harmonization of domestic conditions and consideration of American or international ones is an unavoidable challenge. Both sets are now hot topics, and because both are undergoing change, harmonization is that much more difficult.
And yet, there are major differences that militate against Japan’s lining up neatly with the U.S. reform movement. The level of executive pay is a nonissue in Japan; there are ample scandals, but they did not arise from a corporate culture of greed. Loans to executives similarly are not an issue in Japan. The concept of stakeholder is familiar in Japan, but stakeholder pressure in general is not particularly strong.
Accuracy of financial reports — whatever the realities — has not been perceived as a problem in Japan. Earnings restatements, so common in the U.S., are all but unheard of in Japan. When the Cabinet Office undertook a survey in May of attitudes toward investment, the multiple-choice answers to “What is necessary from the viewpoint of a shareholder-centered corporate management?” did not include one mentioning accuracy. The highest percentage (32 percent) of those surveyed chose “Explanation about the company’s situation to stockholders in easy-to-understand manner.”
Up to now, the dissident stockholder has been rare in Japan. But earlier this year one did try to force apparel-maker Tokyo Style to recycle a larger share of its profits to owners of the company through dividends. This attracted attention in the investment community and there were some sympathizers, but the effort failed. Shareholder proposals are simply not yet a part of Japanese investment style.
Proposals and direct exercise of proxy voting rights, according to Fujii, are still “future issues” for the enormous public pension funds, not to speak of private investors in Japan. In any event, the high threshold for making a shareholder proposal (1,000 shares) compared with that in the U.S. ($2,000 of stock value) suggests that individuals who are not in the equity market on a scale comparable to that of Americans will not become activists.
Pressure for improvement of corporate governance is not a high priority in government, and since individual shareholders are still very much outsiders regarding the companies they own, that leaves the institutional investor. It remains to be seen, however, whether they will take meaningful action in the near future.
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