It’s been a dreadful few months for Japan Inc. Toshiba’s accounting scandal is deepening, Takata’s deadly air bags are deflating the national brand and a deal to save Sharp from collapse has descended into farce.
Each of these narratives makes for bad enough headlines on their own. Together, they raise troubling questions about the Japanese corporate governance revolution about which the foreign media has been buzzing. Modernizing management practices, after all, is a key element of Prime Minister Shinzo Abe’s effort to raise competitiveness and economic growth rates. Unfortunately, it’s backfiring.
Just ask Daniel Loeb, who’s made headlines of his own lighting a fire under complacent CEOs at robot maker Fanuc, Suzuki Motor, jet-engine maker IHI and fading innovation powerhouse Sony. The hedge-fund star’s newest quarrel is with perceived nepotism at Seven & i Holdings, where ailing CEO Toshifumi Suzuki is said to be grooming his son to take over the grocery and retail group.
How did Abe’s revival plan go so awry? Part of the blame goes to milquetoast policies. Abe’s push to internationalize the business culture centered on pressuring companies to increase the number of outside directors and a U.K.-like stewardship code encouraging shareholders to speak out. But adherence to these changes is largely voluntary and packed with escape clauses.
The culpability also rests with executives who think it’s still 1986, not 2016. The painful to watch saga over at Sharp is a case in point.
Among the many paradoxes dogging Abenomics these past three-plus years, it’s perhaps the biggest: If Japan Inc. is roaring back to life, as Abe claims, why aren’t foreign executives rushing to partake in the resurrection? The short-term money certainly came, driving the Nikkei briefly above 20,000 for the first time in 15 years. Long-term investment had been conspicuously absent — until Terry Gou’s Foxconn Technology stepped up with a $6 billion bid for Sharp.
It was a huge moment for Japan Inc. Rather than go with what essentially would’ve been additional public assistance through Innovation Network Corporation of Japan, Sharp went with the Taiwanese electronics assembly giant. Then Sharp pulled a maneuver more in keeping with 1986 than 2016: an 11th hour disclosure of $3 billion-plus of contingent liabilities that’s delayed the deal’s completion for over a month.
The recriminations were fast and furious. Local media accused Foxconn Chairman Gou of showboating to lower the price. Gou, this narrative goes, has a long and tortured history with a Japan Inc. icon he’s been trying to buy since 2012. What’s more, a “foreigners can’t be trusted” storyline coursed through Nagatacho, Japan’s Capitol Hill.
But what of Sharp’s negligence? Clearly, CEO Kozo Takahashi knew how closely watched and highly anticipated this deal was. The will they or won’t they sell to foreigners drama was cast as a litmus test for whether Japan was eschewing the insularity of the past. Looked at through this lens, Sharp’s last-minute disclosure was as inexcusable as it was anachronistic.
Toshiba’s multi-billion dollar book-cooking controversy is reminder enough of the opacity that permeates Asia’s No. 2 economy. The drip, drip, drip of fresh irregularities shows how little changed since the never-again pledges following the $1.7 billion Olympus accounting scandal in 2011. Nor has Takata’s CEO been relieved of duty as its dodgy air bags trip up Honda, Nissan and Toyota and tarnish Japan Inc.’s global clout.
And then there’s Tokyo Electric Power Co., which owns the Fukushima reactors emitting radiation 240 km away from Tokyo. Only recently, five years after a triple meltdown, three top Tepco executives, including former Chairman Tsunehisa Katsumata, are being charged. But you will be hard-pressed to find independent observers who think Tepco’s safety parameters or corporate governance structure internalized the lessons from that dark period.
The problem, of course, is lack of political will. In reality, corporate Japan has barely budged in response to Abe’s tweaks. And that gets us back to 1986, before accelerated globalization and China entered the scene. Back then, the Japanese way — the keiretsu system of close-knit business networks, incestuous public-private sector relations and takeover defenses — worked wonders. But as China rises and South Korea coopts more and more of Japan’s industrial strengths, Abe’s remedies are proving too little too late.
Much of the shareholder pressure Abe hoped for is still coming from outside — from Loeb and his ilk.
“Our goals,” Loeb, who runs New York-based Third Point, wrote in a letter to Seven & i, “are fully consistent with Abenomics: a focus on shareholder interests and returns, and engagement in forward-looking corporate governance that should make Japanese companies more competitive and attractive investment opportunities.”
Instead of asking executives to open boardrooms to foreigners, women and international norms, Tokyo should mandate they do so. That means clear and binding requirements to inject fresh thinking and diversity into boardrooms. It also means offering tax incentives to boards that increase research and development investments, boost domestic job creation and fatten employee paychecks to help bolster consumer spending (another missing key element of Abenomics).
Abe should use the bully pulpit to name and shame companies ignoring the reform zeitgeist. That might encourage Japanese shareholders to follow suit. His government should step up investigations into events at Takata, Tepco, Toshiba and elsewhere, while the ruling Liberal Democratic Party should hold parliamentary hearings. Why, for example, have Takata executives been grilled on Capitol Hill, but not in Tokyo? Sharp pulling a fast one on liabilities also deserves attention in Nagatacho. Such antiquated tactics, Abe and lawmakers must make clear, have no place in today’s Japan.
Once synonymous with cutting edge products, Sharp is now a shameless corporate welfare baby. Why Gou wants this debt-laden also-ran is mystery all its own. Still, the way Sharp has pursued this deal — and myriad other corporate scandals unfolding around the nation — demonstrates why the revolution Abe hoped to spark is more hype than reality.
William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com
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