Japan is one of the few countries in the world with no corporate-governance code, minimal disclosure about firms’ governance practices, and no rules whatever about director training

October 3, 2013, 12:50 p.m. ET

The Reform Abenomics Needs

Changes to corporate governance could spur growth without adding a yen to Japan’s deficit.

By Nicholas Benes

Speaking at the New York Stock Exchange NYX +2.48% last week, Japanese Prime Minister Shinzo Abe told investors, “Buy My Abenomics!” It was the sort of salesman’s chutzpah that Wall Street traders appreciate, but Japan’s economic program is a tougher sell than Mr. Abe may think. And it will remain so unless he delivers on the long-awaited “third arrow” of Abenomics: substantive structural reforms.Investors know that real progress won’t come from Mr. Abe’s tax policy. The sales-tax increase of 7.5 trillion yen ($77 billion) per year will hit consumption hard, and Tokyo will spend less than 7.5 trillion yen on its corresponding stimulus package. The set of tax breaks being finalized is narrowly focused and will help only certain firms. Permanent cuts to corporate tax rates—if there are any—will arrive only in fiscal-year 2015, with the Finance Ministry recently characterizing this as a “medium- to long-term issue,” whatever that means.

Mr. Abe’s fervor for “Womenomics” will likewise amount to little in the absence of labor-law reforms that make it less costly for firms to hire and fire regular employees and that end the bifurcation between the 36% of workers with no job stability (“non-regular” employees) and the 64% with lifetime careers and substantially higher pay. Women are disproportionately represented among non-regular employees, especially once they have children—which leaves them little incentive to develop careers or continue working after becoming mothers.

Thus labor mobility is a bellwether issue signifying whether Abenomics will include a robust “third arrow.” But in April, Mr. Abe told lawmakers that he was no longer considering legal changes to allow companies to make terminations as long as they pay severance. Translation: Don’t hold your breath for labor-mobility reform.

That leaves corporate governance as the last area from which substantive progress could emerge. Smart reforms could have a major impact, spurring faster reallocation of assets, increases in productivity, industry consolidation and entrepreneurial investment. The ruling Liberal Democratic Party has sounded the right notes on this subject in its policy papers—stressing the importance of “multiple independent directors,” for example, and “disclosure of company policy about director training”—but the politics are particularly difficult.

As in past years, Japan’s powerful industrial lobby, the Keidanren, is adamantly opposed to any requirements for the appointment of independent directors. Since the Keidanren’s member companies are major contributors to the LDP, their resistance has always stopped significant corporate-governance reform.

The Keidanren argue that independent directors don’t necessarily improve corporate management or performance, so companies should be allowed to decide how to structure their own boards for themselves. As Keidanren official Soichiro Sakuma said recently: “Companies that want to put photos on their name cards can go ahead and do so. But that doesn’t mean it should be mandatory.”

Given such opposition, most LDP lawmakers publicly avoid the topic of corporate governance. Never mind that it appears in their written proposals. Behind the scenes, lawmakers speak frankly about the Keidanren and say that the topic “needs further discussion.” In other words, it’s going nowhere fast.

Yet there is a way around this problem. Japan doesn’t need mandatory rules about board composition—it could just borrow a page from most other countries and have the Tokyo Stock Exchange promulgate a non-legal “corporate-governance code” with guidance regarding best practices. Companies would then be required to disclose whether they comply with the code and, if not, to explain why not. In many countries (including the U.K., Germany, Singapore, Malaysia and Brazil), this is referred to as “comply-or-explain” disclosure.

Such disclosure encourages management to be accountable for their decisions because investors are better informed. Accountability can unleash investment, productivity and growth in Japan—none of which will result from more years of empty policy promises. As Mr. Abe himself said last week in New York, “without action, there can be no growth.”

Japan is one of the few countries in the world with no corporate-governance code, minimal disclosure about firms’ governance practices, and no rules whatever about director training. It is high time Tokyo caught up with most of the developed world and Asia. And it should do so well before the Olympics in 2020, since so many Japanese corporate scandals stem from cover-ups of safety issues that could hurt the country’s image abroad. Witness the recent brouhaha at railway company JR Hokkaido, which admitted to neglecting 97 dangerous track irregularities, but only after repeated derailments and fires since May.

The best news is that the benefits of reform would be long-lasting, without adding a single yen to Japan’s burgeoning fiscal deficit.

Mr. Benes is representative director of the Board Director Training Institute of Japan.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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