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Home > Opinions Last Updated: 15:02 03/09/2007
August 2001

Corporate Governance in Tomorrow's Japan

Nobuo TATEISI (Chairman and Representative Director, OMRON Corporation)

Mr. Nobuo TateisiRecently, even Japan has finally seen a quickening of discussion and activity concerning corporate governance. The average rate of ownership of stock in listed Japanese firms by foreign institutional investors has reached 12 percent, and many companies have made necessary reforms in their board of directors and their general meeting of stockholders. Corresponding with this trend, an interim draft proposal for related amendment of the Commercial Law Act was submitted just a short time ago by the Legislative Council.

Just the other day, the International Corporate Governance Network (ICGN), a private-sector international organization promoting good corporate governance, held its seventh annual conference in Tokyo and attracted a remarkable 450 participants from inside and outside Japan. I served as Chairman of the Executive Committee, which was also a forum for lively debate.

Corporate governance as conventionally practiced among Japanese firms has three major characteristics: 1) operation of boards of directors and auditors staffed by persons promoted up the ranks from within the company, 2) share-crossholding with other firms in the interest of stability, and 3) setups for support by main banks. These practices have served to prevent hostile takeover, promote stable management, and facilitate the drafting of long-term strategy. As such, they have been rated as a factor behind the success of Japanese-style management.

However, some serious problems with these practices have also surfaced . For example, when most of the members of the board of directors and auditors have come from the company itself, and the president in effect has the power to appoint and dismiss them, the boards can devolve into a group dominated by self-interest. This precludes the proper exercise of powers to check management if executives themselves are deeply involved in corrupt behavior. Similarly, crossholding has had the effect of breeding "silent shareholders" who do not say anything about each other's management, and it has also invited the incapacitation of checks by the capital market. Besides this weakness of checks on management, Japanese companies have been criticized for a de-emphasis on shareholders’ rights and low rates of shareholder profit.

It goes without saying that greater attention to the wishes and interests of shareholders is part of the solution to these problems. Nevertheless, from an executive’s standpoint, I would like to emphasize the benefit on the corporate side, i.e., that reform of corporate governance is necessary for the company's very survival and ought to be discussed more as a means of bolstering competitive strength.

From 1996 to 1998, I represented Japan on the advisory board that assisted the basic rule making for corporate governance in the Organization for Economic Cooperation and Development. At the time, the United States continued to enjoy strong economic growth while Europe was troubled with high unemployment rates and Japan was struggling with the lingering effects from the bursting of its economic bubble. Even then, some of us on the advisory board suspected that the gap among the three economies with respect to growth was derived from another gap, that of corporate governance. That is to say, that the corporate governance gap was mirrored in a competitive gap.

The roughly three years since then have seen a rapid rise in the discussion about and the recognition of the importance of corporate governance here in Japan. This is because as economic activities become increasingly market-driven, companies are realizing that they will be unable to raise funds without good ratings in the capital market, and will also have to execute solid governance in order to heighten their competitiveness. Moreover, concrete steps to these ends are starting to be taken.

Japan must apply globally accepted standards, but this does not necessarily mean that it must embrace the Anglo-American style of corporate governance in its entirety. It cannot be denied that Japanese firms have tended to have a somewhat low awareness of shareholder profit thus far. It should be noted, however, that Japanese executives have instead managed with the conviction that importance should also be attached to the interests of not only their shareholders but also all other stakeholders (i.e., parties with a stake in their business), including their employees, transaction partners, and the surrounding community. It is only natural for corporate governance in Japan to be adapted to Japanese circumstances. As such, a little more time should be taken for discussion of these points.

Although Japanese-style corporate governance has not yet gotten rid of all of its shortcomings, it is in the process of improving overall. This is because many executives have awakened to the need for reform. Behind this turnabout lies a spreading recognition that the structure of corporate governance is a determinant of a company's competitiveness and value.

At any rate, Japanese firms are now facing strong demands for improvement in the following four respects: 1) transparency, 2) accountability, 3) information disclosure, and 4) ethics. There can be no doubt that, in the future, a great competitive gap will open up between those companies that actively undertake reform of their governance and those that neglect to do so.

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