Lex: Japanese governance

Is Japan Inc losing its wa? The concept of harmony has defined corporate Japan since the war. That keeps things cosy in the boardrooms, but sits uneasily with investors. Managers who fear neither coups nor takeovers tend to worry less about maximising shareholder value. Even after this year’s 30 per cent market rally, Japan has more companies trading below book value than most other developed markets.

Signs of dissent, therefore, look encouraging. This year, there have been three big hostile takeover bids, including one launched by a spiky-haired internet entrepreneur for one of the country’s most prestigious media groups. A handful of activist investment funds have pushed companies to lift dividends. The courts adjudicated on a number of corporate gripes and Japan is re-writing its commercial code.

So far, however, progress has been unimpressive. One bid is still live, but the other two failed (fortunately, perhaps, since neither was premised on particularly compelling logic). Their chief legacy has been to encourage corporate Japan to close ranks. The government subsequently gave its blessing to poison pills and wants to introduce golden shares, giving companies more tools with which to fend off unwelcome approaches.

Other developments are similarly defensive. Foreign takeovers look further off the radar than ever. Under new proposals, foreigners launching paper bids will have to secure approval from more than half of the target’s shareholder base by headcount. That is a high barrier in any case, and particularly so in a jurisdiction with fragmented shareholder bases and rudimentary share registers.

Meantime, progressive steps usually carry a kicker. Take the changes to make it easier for shareholders to appoint board members. Companies are responding by cancelling vacant seats – which thus makes it tougher – and still have the option to default to the old rules.

Even after some increases, Japan’s dividend payout ratio is a miserable 20 per cent or so. Activist funds could yet have a field day with companies like Nintendo, the game maker that has $6bn of cash on its balance sheet and a market capitalisation of $16bn or even Toyota, which is increasing its payout but still sitting on $32bn. But for now, the wa looks pretty intact.

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