https://www.wsj.com/articles/SB995573969562397109

July 20, 2001 12:01 am ET

By Nicholas Benes, President of JTP Corporation, an investment bank specializing in merger and acquisition advisory services in Japan.

The yearly convention of the International Corporate Governance Network (ICGN) was held in Tokyo last week. It was a golden opportunity for Japanese policy makers and business leaders to impress the international investment community by unfurling the details of plans — if they had any — to improve corporate governance and accountability along lines of a unique “Japanese way” that builds and improves upon other systems.

Many attendees had hopes to see evidence of such leadership, as this is one of the few ways that Japan can promote “structural reform” and stimulate the economy without spending tax money. It would be tax-positive, by restoring profitability faster. And there are massive savings in bank cleanup costs to be gained from preventing more loans from sliding into irrecoverability.

But the Japanese business leaders who appeared as panelists at the ICGN conference simply intoned defensively about “the unique local environment” and the importance of stakeholders in addition to shareholders: labor, suppliers, management and customers. This would have been fine if anyone had proposed the exact changes which, consistent with this value set, can make corporate governance here function more effectively. But no one did. And the apathy of institutional investors and asset managers was obvious from their absence. Out of some 480 participants at the conference, there were fewer than 20 institutional investors from Japan.

The key to a “Japanese way” may lie in balancing the interests of these various stakeholders, including shareholders. This is a useful starting point, suggested by Yotaro Kobayashi, Chairman of Fuji-Xerox and also the Japan Association of Corporate Executives (the Keizai Doyukai). Japan can and should have a system with some of “its own special features.” This would be acceptable to the international investment community as long as reliable rules are defined in law and practice so that “the cat catches mice.”

Yet no one had the slightest substance to inject into this “stakeholders” rhetoric and thereby prove it might be more than just defensive propaganda. Not a single proposal for a concrete change was made — but many noises resisting change were made. You would never know from Mr. Kobayashi’s comments that the Doyukai itself has promoted the concept of independent outside directors in its policy platforms for four years.

When the obvious question was posed to a panel of stock exchange leaders, “What are you doing to promote corporate governance?”, President Tsuchida of the MOF-dominated Tokyo Stock Exchange (TSE) scrambled to read a prepared statement: “. . .our policy is not to impose any new rules or listing standards. Rather, we hope that companies will change of their own volition.” The tone was so defensive that most observers probably felt sorry for Mr. Tsuchida. As co-host of the conference, he must have felt embarrassed by widening contrast between the TSE’s backward “do nothing” stance and the progressive rules that have been adopted by other exchanges — including many “emerging markets” to which Japan likes to feel superior. Eight countries in Asia have rules requiring independent directors, and six countries require audit committees. Japan was looking like an entire mature economy cutting itself loose from global markets and drifting out to sea.

The attitude that prevails among Japan’s business leaders was best reflected by a very candid comment by Terukazu Inoue, chairman of the Japan Corporate Auditors Association: “The manager-directors of most Japanese companies think it is just ‘a bother’ meiwaku to have to deal with the monitoring and participation of independent outside directors.” Mr. Inoue is right. Even if it might improve governance, most senior manager/directors do not think that they need to raise capital so badly that they should be forced to suppress self-serving feelings of meiwaku, until the company is almost down the tubes.

Supposedly, it is the legal duty of statutory auditors to audit the competence and due diligence of directors, and the “appropriateness” of their decision-making, and to report to shareholders. And clearly, meiwaku feelings often stand in the way of better decision-making. But statutory auditors do not view shareholders to be their primary masters, since it is the board of directors — overwhelmingly, internal executives — which nominate them. (Another reason why independent outside directors are needed.) Statutory auditors have no incentive (rather, the reverse) to report to shareholders about directors’ performance, even though that is amply empowered by the Commercial Code. So no one does, and Japan’s own existing system languishes at 15% effectiveness.

Even so, Messrs. Kobayashi, Inoue and many others are sincere about wanting to see corporate governance in Japan improve. So what is really going on?

The Keidanren has skewed the legislative process to serve the interests of its members, elderly corporate executives. It has dug in too deep, too early, with a longstanding game plan embodied by the Commercial Code amendment bill sponsored by Diet member Sei-ichi Ohta. Now, public opinion and new concepts are getting in the way. But compromise is difficult because the benefits that the Keidanren wants to ramrod through are very personal — and self-serving — for its members. They include: limiting the liability of directors; avoiding rules that facilitate the appointment of independent outside directors; and glossing over the fact that control over selection of statutory auditors is still lodged firmly with the internal boys. (Amusingly, the Ohta bill touts as its main purpose “strengthening corporate governance and the statutory auditor system”!)

By not providing more enlightened leadership, the Keidanren has hampered healthy debate between top business executives. Executives worry about what the powerful Keidanren would do if they made public comments that are “too out of line.” It is like fear of the Mafia.

For instance, a Ministry of Justice advisory council has proposed that the Commercial Code require every “large” company to have one independent outside director. The fast-track bill has been designed in order to foreclose such rules. So to be safe, business leaders shrink from meaningful discussion and just echo the Keidanren complaint that “large” comprises some 10,000 companies, many of them private. But in fact, it is easy to draft around this problem.

Japan deserves far more from its business leaders and institutions. Permitting reasonable mechanisms for limiting directors’ liability would be a good thing if governance actually was being improved and it was necessary to convince more truly independent outside directors and statutory auditors to come on board as part of that package. But Mr. Ohta’s bill goes in the opposite direction.

The bill’s chosen form of “bait” is a deceptive new requirement that half or more of the statutory auditors must be “independent.” It then proceeds to eviscerate the meaning of “independent,” while extending their term to four years. Internal executives (the board) will still nominate candidates for statutory auditors, only now they must also be approved by the statutory auditors’ committee itself — the club itself! — before being proposed to shareholders. The only exception is for candidates proposed by a 1% shareholder, supported by a regular resolution. This makes it almost impossible to get on the slate, because 80% of shareholders meetings take place on the same date, jammed with employees. And the “club” will also determine which auditor is posted on a full-time basis.

To an active shareholder, appointment of a truly independent and proactive statutory auditor could be a powerful tool. The Ohta bill is designed to limit that opportunity, while also foreclosing any chance of rules requiring independent directors. If the Keidanren really wanted to improve the “statutory auditor” system, it would propose rules whereby shareholders could more easily nominate candidates for these positions. It would not just add meaningless gloss to the status quo that prevents this.

— From The Asian Wall Street Journal