The Journal The Authority on Global Business in Japan


December 2013


By Nicholas Benes

Structural reforms to enhance productivity—by facilitating asset reallocation, enabling innovative business models, and speeding up economic metabolism—are the central feature of the so-called third arrow of Abenomics.

The underlying concept is very much in keeping with the recommendations of the ACCJ Growth Strategy Task Force’s 2010 white paper, Charting a New Course for Growth—Recommendations for Japan’s Leaders.

To undertake its planned reforms, the Liberal Democratic Party (LDP) appears to have correctly recognized that improving corporate governance is one of the most important levers that the government can use. For example, in its June 14 growth strategy policy document, the Japanese government wrote: “In order to back up aggressive business management, [we] will encourage active use of outside directors.” This is progress!

Submitting a bill to the Diet at an early date to amend the Companies Act and taking measures to promote the introduction of independent outside directors, the government will enhance initiatives to secure at least one outside director, “with the aim of promoting sustainable growth of companies, discuss and establish the principles for a wide range of institutional investors to appropriately discharge their stewardship responsibilities through constructive dialogues with invested companies . . . .”

In June, the LDP’s “Policy Proposals” manifesto promised rules requiring not just one outsider, but “multiple independent directors” on the board of every Japanese listed company.

And, in its May 10 Interim Report, the LDP’s Headquarters for Japan’s Economic Revitalization proposed a rule requiring each company to disclose its policy about director training (whether they have any). Further, the LDP’s growth strategy has proposed measures to improve governance in educational institutions, in addition to corporations.

This all makes a lot of sense, assuming, of course, that it is more than just campaigning and actually gets put into law. You can undertake all the structural reforms you like, but Japan will continue to limp along at its present low levels if private companies and other institutions do not use their surplus cash to seize new investing opportunities and/or restructure their businesses. They need to exit low-productivity product lines, as well as focus their strategies, and enhance productivity growth and economic metabolism.

The discipline and rigor that good corporate governance can provide is essential to driving this process. In this light, consider that over the past 20 years, the corporate sector has become by far the largest holder of Japanese government bonds. It has huge cash deposits that are now being invested at rates that are nearly zero, which, of course, is far less than each company’s cost of capital.

In short, a lot of assets are misallocated, a lot goes wrong, and a lot of people suffer when corporate governance and its rigor do not hasten and hone good decision making—including, most of all, the tough decisions.

When governance doesn’t work well
Of course, corporate malfeasance is a prominent and obvious example of what can go wrong. But in the economic sense, equally—if not more—important are the opportunities that corporations miss and the strategic mistakes they make. This can happen if governance rigor does not encourage executives to acknowledge market realities, focus the business, and react soon enough.

The following are examples of the things that can go wrong that I have seen in my 25-odd years of advising local companies in M&A transactions, or while sitting on boards here.

  • A bank has controlling interest (less than 51 percent) in a local bank that it consolidates in its financial statements. It is clear that this is a non-core asset that has no synergies with the bank’s strategy and is a source of risks that the bank cannot understand well.

When financial advisors approach senior managers to introduce interested buyers, the answer from the director-in-charge is: “Yes, we know we should sell. But we cannot until the ex-chairman who did the original deal to buy it passes away.”

  • A major company has multiple divisions with few or no synergies among them. Overall profitability is not high, but one of the divisions is a drag, not only on profit but also on resources. It has only 2 percent of the world market in an industry where economies of scale make a big difference.

The company should have sold the division five or 10 years earlier, while it still had considerable value. Instead it kept hunkering down “because to consider selling it . . . most of all to a foreign company . . . would be betrayal.” Multiple offers come in the door, but without seriously considering selling to a firm that can be a better “parent,” the company continues to resist, giving support to the division destined to shrink even more. And it does.

This happens in several other divisions, with the board unable to focus its strategy. Each division is a fiefdom represented by an internal director. Yet, the divisions with truly superior technology and potential are not receiving enough funding.

  • A major investing institution sees its rival buying a very famous asset or property abroad, such as a well-known resort, headquarters building, or company. The CEO views the CEO of the rival firm as his personal rival.

When the next very well known similar asset comes up for sale, the CEO tells his head of the international division to buy it at any cost. Even if the latter protests, he is forced to overbid by a tremendous amount to win the deal. (In some scenarios, the same person is forced to fall on his sword five years later when the deal goes bad and the asset has to be sold, at a huge loss).

  • A company is seeing its entire industry go digital. Independent directors on the board try to convince management to sell the company and its valuable database to a strategic acquirer in the internet space, while they still have value and before the company goes bankrupt.

However, internal executives on the board resist the idea. Two years later, they negotiate with private equity funds as “they ensure we can keep our managerial independence” (their present posts and salaries). The outside directors advise them that this is a fantasy.

One year later the company goes bankrupt, causing the founder (80 years old and long retired) to declare personal bankruptcy; he had guaranteed loans which he had forgotten about.

If you care about Japan’s future and the people who are adversely affected by events such as the above, dysfunctional corporate governance is a painful thing to watch or participate in. After a while it is almost as if you can feel economic value and human resources going down a rat hole.

Thus, the fact that governance is a bulwark of Abenomics’ third arrow is major progress.

Time will tell how many of the newly proclaimed policies actually get written into law and are converted into managerial attitudes and practices. But the government is headed in the right direction.

If you see the policies being implemented in a robust fashion, Japan has a lot of upside. If you see them getting scaled back and forgotten, we may remain in the doldrums.


DividerNicholas Benes is representative director of The Board Director Training Institute of Japan (, a non-profit public interest organization.