Cross-Shareholdings: “Enjoying the Quiet Life: Corporate Decision-Making by Entrenched Managers”

This excellent working paper by Naoshi Ikeda, Kotaro Inoue and Sho Watanabe describes their research that leads to the conclusion (similar to BDTI’s own research) that cross-shareholdings in Japan negatively impact risk-taking, investment for growth, and the frequency of restructuring activities.  Conversely, when managers are monitored more heavily by investors and independent directors, they are positively affected.

Japan’s Productivity Gap – Employment System Re-examined

Japan’s GDP per hours worked only amounts to just above 60 percent of the level in the US. In a rapidly ageing society, such a situation is no longer tenable. When the employment to population ratio declines, productivity needs to increase in order to preserve the level of welfare.

Compared to other nations, Japan’s adult population is highly educated. Investment in research and development is also among the highest and corporations have access to an abundant amount of financial capital. The low level of productivity can therefore not be explained by lack of skills, technology or capital. Rather, the available resources are simply not employed in the best possible way.

The deficiencies are being acknowledged by the Japanese government, which is pushing for a “productivity revolution”. Besides the classic approach of promoting new technologies and the recent support for start-ups also undertaken in other countries, the emphasis is on corporate governance reform, more flexible labour markets and a change in working practices (hataraki-kata kaikaku, 働き方改革).

”Abenomics & Inclusive Growth” by Aoyagi Chie and Giovanni Ganelli

”In the last few years, policy makers in Japan have embarked on an ambitious effort to decisively get the economy out of deflation and revive growth. This policy approach, which has been dubbed “Abenomics” after Prime Minister Shinzo Abe, comprises three so-called “arrows”, namely monetary policy, fiscal policy, and growth enhancing structural reforms. In this article, we seek to evaluate the effects of Abenomics’ reforms in terms of inclusiveness. Inclusive growth is a multidimensional concept and the notion has varying definitions, interpretations and connotations. To study the degree of inclusiveness of the Japanese economy, we will first review trends in equity, and then refer to econometric studies attempting to assess how implementation of Abenomics is expected to affect inclusive growth…..”.

Read full article here.

VIDEO: Global Agenda Debate – ”Abenomics at the Crossroads”

”Nearly 4 years have passed since Japanese Prime Minister Shinzo Abe launched the series of economic policies, dubbed “Abenomics”. It is centered on “three arrows”: Bold monetary policy to end the deflation, Flexible fiscal spending to stimulate the economy through large-scale public works projects, and Growth strategy to nurture industries. Today, Abenomics is drawing both praise and criticism. Though the profits of TSE’s First Section-listed companies hit record high for 3 straight years, the economy is still suffering from low growth rate. The unemployment rate dropped as 1 million jobs were created, but inflation-adjusted wages remain low. With the increasing social security costs due to the aging and shrinking population, government debt is ballooning. Can Abenomics revive the Japanese economy? 5 experts from economics, politics and business attend a Global Agenda forum at The University of Tokyo to discuss how the world rates the policies and what it expects from them……”

”Corporate Governance: Tools for the job” by Arthur Michael Mitchell

Despite the fact that many still doubt how successful the Abenomics corporate governance reforms in Japan that led to the introduction of the Stewardship and Corporate Governance Code and the amendment of the Companies Act, Arthur Mitchell, a senior counselor with White & Case in Tokyo strongly believes otherwise. He writes an insightful article explaining that while the effectiveness of the reforms will largely depend on the way they are implemented, the reforms will certainly enable market participants to change their corporate performance and overall corporate culture. (Note: Arthur Mitchell has taken BDTI’s director training course in Japanese, and currently sits on the board of Mitsui Sumitomo Financial Group.)

Read full article here.

”Can Abe’s third arrow reforms benefit investors?”

Although the “third arrow” in Japan still has mixed reviews, it can not be denied that with the shift to deliberate improved corporate governance, there is more shareholder involvement in Japanese companies.

In this article, Mr. Naoki Kamiyama of Nikko Asset Management, describes some of the positive changes that now benefiti nvestors.

Read full article here.

Source: FE Trustnet

Culture by Design – Interview with Sir Win Bischoff on Corporate Culture

Below is an insightful interview with Sir Win Bischoff, Chairman of the Financial Reporting Council and formerly Chairman at Lloyds Bank. He speaks to  Alexandra Jones, Editor of the Governance and Compliance Magazine on corporate culture and shares his experience on how a strong culture helped him lead Lloyds through the financial crisis. He explains how by its very nature , culture is not short term but much longer than a strategy of a business model.

He further shares his view on the responsibilities of management and the board, in terms of establishing the right culture and how long it takes to change a bad culture, among others.

The Future of Asset Management, by Jeroen van Oerle and Patrick Lemmens

Executive Summary:

 During the past decade, the asset management industry was mostly occupied with regulatory changes dictating costly compliance procedures. The increase in regulatory burden was mainly felt by small asset management firms. In addition to increased regulatory costs, fee pressure has had a large impact on the industry as well.

In the coming years we believe these two forces will remain top of mind, but they have different drivers now. Technology has entered the asset management industry. This will add costs because asset managers have to live up to ever-increasing customer demands regarding immediacy, connectivity and ubiquity. At the same time, this leads to an increase in fee pressure due to growing transparency, comparability and competition from nonfinancial companies. We think the asset management pie is still growing strongly, but not everyone is invited to take a piece.

“The Rise of Indices Is Changing the Face of Investing”, by Angana Jacob and Sunjiv Mainie, CFA

EXECUTIVE SUMMARY

A confluence of factors including technology, regulation, investor skepticism of manager skill, and fee-consciousness, has favored the rise of index investing. The pace of growth and complexity of change make it difficult for investors and managers to stay informed about these critical trends. In this report, we provide an overview of the rise of indexing, as well as its impact, both realized and potential, on the asset management industry.

The first half of the paper outlines the key trends in indexing and fund management, specifically:

1. Fees are under pressure. Changes in technology and economies of scale have helped commoditize beta;

2. Product scope is continually broadening, with index-based investing making inroads into active management. Smart beta and the growing interest in hedge fund beta paves the way for further growth of passive index funds at the expense of active management; and

3. Technology advances allow for mass customization and an increased focus on outcomes. The outcomes required by individual and institutional market participants are becoming critical—index funds may benefit due to their low cost and heightened transparency.

”Insurance Is a Better Buffer Against Crises than Cross-shareholdings”

According to this recently-published discussion paper by the Foreign Non-Life Insurance Association of Japan, risk management provides a better barrier against crises than maintaining cross-shareholdings with friendly firms. The paper puts corporate governance in the wider context of economic growth and security and highlights the fact that management of Japanese companies is often not organized so as to to use risk management solutions that can be provided by insurance. An example mentioned is that only  around 17% of the losses from the 2011 Eastern Japan earthquake were recoverable by insurance, as compared with 75% recovery in the case of the Christchurch, New Zealand earthquake the same year.

The paper proposes supporting stronger corporate governance, fostering a culture of risk management and leveraging best industry practices.

Read the discussion paper here.

Source: Foreign Non-Life Insurance Association of Japan Inc.