The Journal The Authority on Global Business in Japan

In March 2014, I was appointed as an independent board director at a publicly listed Japanese company, GMO Cloud K.K. Its core business involves Internet and cyber security, in connection with which it provides digital identity management solutions.

My appointment comes in the wake of corporate governance reforms instituted by Japan. These have been a key element of the third arrow of Abenomics, Prime Minister Shinzo Abe’s reform policies to re-ignite the Japanese economy.

While generally welcomed by the business community, the full import of the corporate governance reforms remains unclear.

For many, basic questions remain unanswered. These I hope to answer below, from the perspective of a non-Japanese board director of a Japanese company.

VALUE CHAIN
The Tokyo Stock Exchange’s (TSE) Corporate Governance Code defines corporate governance as “a structure for transparent, fair, timely and decisive decision-making by companies, with due attention to the needs and perspectives of shareholders, and also customers, employees, and local communities.”

The subtitle of the TSE Code is its mission statement: “Seeking sustainable corporate growth and increased corporate value over the mid- to long-term.”

Why is the new code important? It’s fair to say that our families’ means and the quality of life we enjoy depend on the growth and success of companies, including their investment in new technologies and products.

Companies are on one end of the investment chain; on the other end are pensioners and individuals. In between, there is a long chain of investment intermediaries, including investment fund managers and analysts.

The key is to make companies as successful as possible, so that they may deliver maximum returns to stakeholders. Everything in between is essentially overhead, and needs to be as efficient as possible.

Overall, the investment chain needs to be built on long-term trust and stewardship, not on anonymous momentary transactions. As such, a key component of the investment chain is corporate governance.

WHY JAPAN?
Japan is the only major country with an economy that, apparently, does not grow. Even the Keidanren (Japan Business Federation) and Toray Industries, Inc. Chairman Sadayuki Sakakibara bemoaned this fact during the 2015 Kyoto Bank New Year’s Gala event.

Stanford University economics Professor Takeo Hoshi, moreover, has analyzed reasons for a lack of corporate governance reform, and for Japan’s economy having stopped growing after, in the 1980s, it had caught up with developed economies.

Clearly aware that this is one of the factors inhibiting Japan’s growth, Abe has created momentum for corporate governance reform. But how does policy compare to practice?

THEORY AND PRACTICE
My work as an independent board director of a listed Japanese company is based on the recently revised Company Law and the TSE Code.

In practice, my responsibility is to see that the company is successful and grows in a competitive and fast-moving global market.

To do this, I need to understand our company’s business, including products and financial results, as well as the global cloud and cyber security markets.

What’s more, I need to have the ability to communicate in Japanese with fellow board directors and company executives, including the Group CEO and CEOs of subsidiaries.

Most importantly, I need to push my input to execution.

The business reality is that, as of this writing, in this country there are 3,488 publicly listed Japanese companies and some 1,000 large private Japanese businesses.

Some 10 to 20 Japanese enterprises, including Rakuten, are “Englishized” or they hire interpreters at board level.

Of the remaining 4,468, virtually all are run using the Japanese language exclusively and by Japanese men.

In a rapidly globalizing world, these companies are in desperate need of internationalization and diversity. This means global input from many different nationalities, and more women at board level.

However, as is widely acknowledged, Japan’s lack of international human resources is one of the many factors limiting the country’s economic growth and competitiveness.

TROUBLE AT THE TOP
And it’s not just the lack of diverse and international talent that ails Japan. A lack of leadership may well be the country’s Achilles heel.

Japan undoubtedly has many great leaders, such as Kyocera’s founder Kazuo Inamori, who also co-founded KDDI and, when in his 80s, turned around Japan Airlines Co. Ltd. from bankruptcy.

Japan also has many non-leader chief-administrators in powerful positions. Problems and inefficiencies may occur if such chief-administrators can’t give up power on retirement and, for example, become advisors to chairmen.

Many Japanese industries showed no growth and no income for 15 years or longer during the so-called lost decades.

This represents a dramatic example of a total industry-wide failure of corporate governance and, surely, a big factor in Abe’s push for corporate governance reform.

Recent accounting issues at Toshiba Corporation are a symptom of these much deeper problems.

I see Toshiba’s accounting debacle in the same way that some investigators viewed the Space Shuttle Challenger disaster of 1986: Nobel Prize-winning physicist Richard Feynman determined that the cause of the disaster was the failure of top management to communicate with subordinates.

In the case of the Challenger, top management insisted on the planned launch date, while the workers on the ground knew that they were not ready. That failure to listen to those on the ground led to disaster.

WHEN IN TOKYO
How, then, can we navigate Japan’s corporate and cultural minefield? When seeking more influence with Japanese companies, it will not do to raise one’s voice either at the CEO or in board meetings.

It pays to develop trust and relationships, even if you are a shareholder.

Learning Japanese is a good starting point if one is to earn trust and contribute to business achievements in Japan. Another sound step is to partner with those who already have such links and skills.

Furthermore, by working hard until your leadership skills are in demand, or contributing before making demands of your own, one can become an accepted and trusted member of the community.

The same applies to the foreign companies operating in the Japanese market.

As your subsidiary in Japan is a Japanese corporation, it pays to ensure the corporate governance of your Japanese subsidiary—defective corporate governance of Japanese subsidiaries of foreign companies arguably caused recent scandals that ensnared some pharmaceutical companies that had entered this market.

To minimize such risk, one has to make good use of one’s Japanese board of directors, as ordered by the country’s Company Law.

Ultimately, improving corporate governance is one of the factors needed to reinvigorate Japan’s growth.

It is also clear that cultural inbreeding leads to disaster, and that diversity of leadership is an essential ingredient for growth and success.

And knowing the culture and language of the host country is a smart move when doing business.

Gerhard Fasol is a physicist and founder and CEO at Eurotechnology Japan K.K.
He is also an independent board member at GMO Cloud K.K.