Japan investors look abroad for wind of change

It took trade officials from outside Japan to open up the country’s market to California oranges, Australian beef and American cherries.

A similar reliance on foreign pressure can be seen now in the capital markets.

As Japanese companies prepare for their annual shareholder meetings next month, the Asian Corporate Governance Association, representing major institutional investors globally, is calling for an overhaul of corporate governance in Japan.

The ACGA’s first policy paper on corporate governance in Japan, published last week, has been endorsed by the California Public Employees’ Retirement System, Hermes Fund Managers and other large institutional investors with combined funds of $5,000bn.

But conspicuously absent are the names of Japanese funds, even though many domestic institutions have the same concerns as the foreign institutions, and privately complain of the corporate governance breaches widespread in Japan.

What is more, “the people who suffer [from the inefficiencies stemming from poor corporate governance] are the Japanese,” says Michael Connors, senior adviser to Hermes, one of the UK’s largest investment funds.

The paper comes as several prominent foreign funds have been calling independently on Japanese companies to improve their corporate governance.

The Children’s Investment Fund is asking J-Power, in which it owns a 9.9 per cent stake, to appoint external directors, reduce cross-shareholdings, improve return on equity and raise the dividend.

Perry Capital is calling on NEC to reduce its control over NEC Electronics, its semiconductor subsidiary, to allow the latter to boost its performance and returns.

The ACGA’s policy paper highlights growing frustration among foreign investors at the slow pace of corporate governance reform in Japan.

“There has been some reform [to corporate governance] but progress has been slow, and foreign money is now leaving,” says Jamie Allen, ACGA secretary general. In the year to the end of March, foreigners sold a net Y1,520bn ($14.6bn) of Japanese shares – the largest outflow since the year ended March 1997, according to a report released last week by the ministry of finance.

Given that foreign investors comprise about 70 per cent of trading on the Tokyo Stock Exchange and own about 27 per cent of Japanese stocks, their concerns should be of interest.

Topping the ACGA’s list is the widespread lack of regard for shareholders’ rights. Japanese companies often ignore the views of shareholders on the grounds they are not sufficiently involved in, or informed about, company business, the association notes.

This disregard for shareholders rights is also demonstrated by the way shareholder meetings are concentrated in a short period of time, investors say. Nearly 1,000 companies schedule their AGMs on the last Thursday in June, for example. According to ACGA, another way in which shareholders are short-changed is in the tendency of Japanese companies to hoard cash, rather than return excess funds to shareholders.

This strategy turns the company into a kind of corporate “savings box” and serves to entrench management, the ACGA says.

One important step Japanese companies should take to improve corporate governance is to appoint independent external directors.

The critical question is whether the ACGA’s policy paper encourages debate and reform, or results in corporate Japan closing ranks.

Domestic investors might find that behind-the-scenes discussions are more effective in Japan, but for foreign investors who are running out of patience, that is clearly no longer an option.

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