Japan discovers “good” corporate governance, American style

Not so long ago in an age when they were eating the lunch of American corporations, the Toyotas, Hitachis, Sonys, Canon, Hondas were governed in the worst possible way, at least according to the canons of American governance.

Their boards were made up almost exclusively of corporate insiders, with no independent directors, no diversity, no obeisance whatsoever to the diktats of governance gurus and enforcers, no responsiveness to investment funds and financial markets. Of course these were also the days when corporate control resided in keiretsus (or network of interconnected firms and banks). Only 5% of the Japanese companies’ shares were owned by foreign investors in 1990. But “the times they are a changing”.

Now foreign investors, holding over 30% of their shares, are unrelenting in their pressure for Japanese companies to adopt American-style governance. New governance codes have been written and Japanese stock exchanges are pushing for their implementation.

Foreign money managers and institutional investors stand to benefit from changes in the ethos of Japanese companies which would make them more like American companies in their devotion to shareholder value creation.

That may be the inevitable outcome of a globalized financial market but Japanese promoters of this new governance orthodoxy did not quite understand that “good” governance provides the lever, the entry point for activist hedge funds and their cohort of supporters. These funds thrive, and can implement their standard recipes, only where publicly listed companies have no controlling shareholders and when they can robe themselves with the mantle of defenders of “good” governance.

And they are now coming to Japan in droves.

On April 7th 2016, having lost a board fight to Daniel Loeb (head of Third Point LLC., an activist hedge fund known for its aggressive tactics) Toshifumi Suzuki, founder, chairman and chief executive of Seven & i Holdings Co. (owner of the Seven-Eleven chain) resigned his position. The result represents a victory for shareholder activists who have targeted Japanese companies on the back of Prime Minister Shinzo Abe’s corporate governance campaign for businesses to increase shareholder returns. (FT.com, April 7th 2016).

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