The Japan Investment Corp. — the nation’s largest public-private fund, with ¥2 trillion in capital — plunged into paralysis just three months after it was launched in a reorganization of its predecessor, the Innovation Network Corp. of Japan, when all nine of its board members from the private sector tendered their resignations, including president and CEO Masaaki Tanaka. In the bitter standoff between JIC’s management and the Ministry of Economy, Trade and Industry that eventually led the fund’s board members to quit, disagreements over their executive compensation were highlighted. The fundamental cause of the rift, however, was their differences over how the public-private fund — designed to invest in promising businesses and technology to revive Japan’s industrial competitiveness — should be run. Unless this issue is resolved, the future of JIC — and other public-private funds for that matter — will remain in doubt.
Tanaka, a former vice president of Mitsubishi UFJ Financial Group who was tapped by METI to lead the fund in its launch, said he and other private-sector members of JIC’s board were resigning because mutual trust was lost when METI frequently changed what it told JIC’s management. METI reportedly agreed in September to pay JIC executives as much as ¥100 million or more, but unilaterally retracted the offer in November. METI chief Hiroshige Seko this month stated, “There is a sense of an appropriate level that the public can accept,” indicating that the executive pay of over ¥100 million was too high, which raises the question why such compensation was offered in the first place. Seko insisted that the amount initially presented to the JIC management was an idea that had yet to be finalized.
But the spat over remuneration was not the only problem that marred the trust between JIC and the government, its largest shareholder. The JIC executives were reportedly unhappy that the government, which initially left individual investment decisions up to them, began to demand that the fund obtain its approval for each investment. That poses the larger question of how such a fund should be run: whether the government should have a role in its investment decisions because it provided the financing, or whether the fund’s management should be left in the hands of the private-sector professionals who were tapped to the jobs for their expertise.
Public-private funds were created one after another when Prime Minister Shinzo Abe returned to the helm of government in 2012 as a part of his administration’s growth strategy. They were meant to use private sector investment know-how in spending government funds for purposes such as beefing up the nation’s agriculture, supporting venture companies and financing the Cool Japan strategy of exporting Japanese culture. Whether these funds have served their intended purposes, however, remains in doubt. Investments by many of the funds fell short of plans and according to a survey by the Board of Audit as of March 2017, six of the 14 public-private funds incurred losses.
JIC’s predecessor, the Innovation Network Corp., also came under criticism that its investments focused too much on schemes to effectively bail out struggling or failing businesses instead of investing in promising startups to foster their growth. That’s why it was reorganized into JIC, which reportedly declared that it would dedicate itself to supplying “risk money” for businesses and technologies with growth potential. Through such investments, it was hoped JIC spur private-sector investments in next-generation industries and technologies. With the resignation of the nine JIC executives, leaving the board with only a few members from the government, the activities of the fund will effectively grind to a halt. Given the high-profile spat with the departing executives, the government’s effort to tap a new executive team from the private sector is expected to face difficulties.
There are views that the JIC’s paralysis throws the wisdom of creating public-private funds into question. The government will need to first assess what went wrong in its dealings with the outgoing JIC management and consider how it should proceed with running public-private funds. The questions that require answers should include whether public-private funds are needed in the first place as a tool in the government’s industrial policy; what should be their purposes and functions; how they should be run to best serve those functions; and what should be the government roles in the funds’ operations. In addition, if the government is tapping private-sector professionals to take charge, what specifically does it expect of them and entrust them to do, and what should be the appropriate level of compensation for their expertise? These questions need to be answered to regain trust in the government that the departing JIC executives said was lost.