The Journal The Authority on Global Business in Japan

The reform-minded spirit of Abenomics can be seen in the structure of a recently introduced Corporate Governance Code, but questions remain about how the code has been implemented, clouding future relationships between smaller Japanese companies and their shareholders.

A series of scandals involving the misuse of company funds serves to illustrate the difficult relationship between Japanese companies and their shareholders.

The latest disgrace involves Toshiba Corporation, which admitted overstating profits to make it appear that it was hitting targets. As a result, share prices were artificially propped up, with incorrect signals sent to shareholders.

The Association of Chartered Certified Accountants (ACCA) and KPMG, Singapore, ranked 25 countries on corporate governance performance in a November 2014 report entitled Balancing Rules and Flexibility: a study of corporate governance requirements across 25 markets.

Japan was positioned 21st, ahead of Vietnam, but behind Cambodia, China, Canada, and the Philippines, highlighting the difficult relationship between companies and capital providers.

Japan faces a battle to bring its boardroom behavior up to international standards, if it is to entice international investors to buy shares, especially those in smaller companies.

A Corporate Governance Code was introduced on June 1, requiring companies to rethink shareholder relations, in much the same way that a Stewardship Code of February 2014 shook up operations for asset managers.

Abenomics is seen as a prime driver of this initiative. “Without Abenomics, corporate governance would not have started,” says Kenji Shiomura, senior strategist in the Investment Strategy Department at Daiwa Securities Co., Ltd. “It is unlikely that the code would have been introduced under a different government.”

Prime Minister Shinzo Abe has created the necessary environment for the corporate governance code to flourish by motivating the private sector, and recognizing the limits of what the fiscally strapped public sector can do, Shiomura added.

Banker’s paradise
Japan is a bank-based financial system, with systemic similarities to countries such as Germany, rather than the market-based financial systems of the United States and the United Kingdom, and has been characterized by stable cross-shareholdings between banks and companies.

At their peak in the late 1980s, over half of Japanese shares were held in such cross holding arrangements. Shiomura estimates that figure is now closer to 15 percent, and likely to fall further as banks sell to satisfy capital adequacy requirements under the Basel Committee on Banking Supervision (Basel III) measures that list cross-shareholdings as risky assets.

The New Normal
Under the new Corporate Governance Code, companies are required to file reports following annual shareholder meetings, which are concentrated in the final week of June.

It was a positive surprise for Shiomura, then, that the Mizuho Financial Group not only filed their report on June 1, the day that the code was implemented, but also publicly stated that neither the bank-holding company, nor its subsidiaries—including Mizuho Bank—would engage in cross-shareholdings with other companies.

“This was a surprise,” he said. “If a small business corporation or mid-ranking bank had made the announcement, then it would’ve had a different effect. The fact that a megabank has made this announcement makes it completely different.”


Asset managers have been putting efforts into raising governance-based awareness among smaller companies to make themselves more attractive to shareholders. Hiromitsu Kamata is head of the Target Japan Department in the Fundamental Investment Group at Amundi Japan, the local arm of Paris-based Amundi Asset Management, a top-10 global asset manager.

His group maintains smallholdings of up to 5 percent in a number of Japanese companies, including a family-owned, housing-related manufacturer located in the Chubu region.

Over the past three years, Kamata has persuaded the company to operate more efficiently and transparently. Under a second-generation company president, the firm has revamped its board, which now includes three outsiders, among a total of eight directors.

The growth stance that Kamata has promoted has also seen the company decide to construct a new manufacturing plant. It intends to inject more vitality in the workplace by hiring new staff in an attempt to bring down the average age of employees, which as of 2014 was about 45, eight years higher than in 2003.

These policies have produced benefits for the company, resulting in a 30 percent year-on-year boost to dividends in 2014.

According to the Financial Services Agency, the purpose of the Corporate Governance Code is “to stimulate healthy corporate entrepreneurship, support sustainable corporate growth, and increase corporate value over the mid- to long-term.”

And, while Takeyuki Ishida, executive director, Institutional Shareholder Services K.K., believes the code is a positive development, he finds fault with it on a number of levels.

“First of all, the Corporate Governance Code contains too many questions—some 70 in all. Companies will be tied up in paperwork if they are to properly answer them all,” he says. For Ishida, the most important elements of the code concern the nomination and remuneration of directors.

In the United States, the Board of Directors is the ultimate decision- making body, and works closely with a nomination and a compensation committee. These concepts are unfamiliar to many small companies in Japan, where few have such committees.

In the majority of companies based on statutory auditors, the company president holds power, and often executes it without a recognizable process, documentation, or transparency.

“If asked ‘how do you decide compensation,’ the answer is, ‘the company president sets compensation’ , ” Ishida says. “It is companies like this that are having a hard time responding to the new code.”

The Japanese Corporate Governance Code has been modeled on the Organisation for Economic Co-operation and Development Principles of Corporate Governance and the UK Corporate Governance Code, and is principles- rather than rule-driven.

The Japanese code borrows from the UK Corporate Governance Code in the sense that companies need to comply with reporting requirements, and explain their reasons if they do not do so.

Failure to comply, and respond to demands for an explanation, may violate securities listing regulations on the Tokyo Stock Exchange (TSE), but the TSE has yet to release definitions of what constitutes adequate written explanation.

In addition, it was originally intended that companies would publicize relevant governance reports to shareholders ahead of annual general meetings; the reports would form part of the discussion process between companies and investors.

But, vested interests appear to have postponed this until after the annual general meeting, effectively diluting its power to influence events, Ishida says.


Japan has gone a long way to appoint outside directors to its boards, and statistics by Institutional Shareholder Services Inc., a leading provider of corporate governance advice and solutions, show that 55 percent of Japanese companies fulfill requirements to have two outside directors compared with 2014, and more than 94 percent have at least one outside director on the board.

The problem is that, in Japan, a position on the board is viewed as a trophy appointment, rather than a post with a task.

“In Japan, the basic mentality is that people graduate from universities, join companies, and aim for a seat on the board, as a career goal,” Ishida says.

“Awarding directorships to outsiders means that the number of directorships for insiders will be reduced. Anything that changes that basic structure is a major shift in the socio-economic paradigm.”

Ultimately, it seems, Abe’s heart may be in the right place, but he needs to get his head together with that of chief executives at smaller Japanese companies, to properly implement the new code, and usher in an era of more friendly relations between boardrooms and shareholders.


Martin Foster is a bilingual writer who has lived in Tokyo since 1977. Martin spent much of his career in financial journalism, and now focuses on various aspects of business and the economy.