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Corporate governance: Is the landscape changing under Abe?

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The 2011 Olympus scandal laid bare many of the shortcomings of corporate governance in Japan, along with some of the worst aspects of a deferential, opaque and even dysfunctional business culture.

While the multi-billion-dollar fraud exposed by former Olympus president and CEO Michael Woodford was a rare case, the closing of ranks, prolonged denials, silent institutional shareholders and a passive domestic media were all too familiar.

Identifying the cure for such institutional ills is no simple task, but many see better corporate governance as a start. The government of Prime Minister Shinzo Abe has put unprecedented focus on the issue in this year’s growth strategy and initiated plans for a corporate governance code. Meanwhile, the Tokyo Stock Exchange also launched at the end of 2013 a new index — JPX-Nikkei Index 400 — designed to promote better governance. However, some doubt these measures can counteract underlying cultural tendencies that hinder effective management in Japan.

Perhaps unsurprisingly, Woodford is not optimistic that the new measures will be effective in preventing another scandal like that at Olympus, which saw him summarily dismissed by the rest of the board for investigating fraudulent payments and accounting.

“I think [the new measures are] well-intentioned and certainly can’t do any harm, but I think it’s dangerous to overstate the impact they will have,” says Woodford, in an exclusive interview with EURObiZ Japan. “They are trying to encourage institutional shareholders to speak out when things go wrong; take their responsibility as shareholders.”

There was “not one word of criticism” by major domestic Olympus shareholders during the Woodford affair, despite global media attention. Even then-Prime Minister Yoshihiko Noda weighed in on the scandal to reassure the world that it wasn’t representative of corporate Japan.

“That is what is so uniquely different in Japan; in the West, it would have become toxic for those institutional shareholders if they hadn’t shouted from the rooftops about it,” says Woodford.

“It seemed as if they were more concerned about me making a noise and speaking out than a billion-dollar fraud,” he adds. “The code in Japan, the unwritten code, is that you don’t do that.”

Woodford’s book, Exposure. Inside the Olympus Scandal: How I Went from CEO to Whistleblower (2012), recounts the events of the scandal, elements of which wouldn’t be out of place in a thriller. The book also demonstrates the closing of ranks on someone who has violated the code, particularly as an outsider.

“It’s not just bringing in realistic management practises based on ability and performance from overseas; it’s also allowing Japanese who’ve got those skills to thrive in an organisation. I think people who are direct and forceful are still not welcomed,” says Woodford. “That’s an intractable problem with the DNA of Japanese management, and there’s no simple solution to that.”

There are glimmers of hope, though, according to Woodford, who cites the appointment of Christophe Weber as president, representative director and chief operating officer of Takeda Pharmaceutical, in spite of protests from certain former executives and founding family members that a foreigner couldn’t manage the company.

Takeda’s former president and current chairman and CEO Yasuchika Hasegawa — current chairman of the Japan Association of Corporate Executives (Keizai Doyukai) — was outspoken in his view that nationality shouldn’t be a consideration in choosing candidates.

“If I hadn’t heard someone like Hasegawa speak out in such simple terms — you need the best people for the job — my view would be even darker than it is,” Woodford adds.

Someone who has a more positive outlook is Nicholas Benes, head of the Board Director Training Institute of Japan (BDTI), a non-profit, public-interest association dedicated to improving corporate governance in Japan.

“The sea change that has occurred here in the last two years, especially the last eight months, has been that Japan has reached a tipping point where corporate governance is no longer seen as something that only the foreigners want — but not really consistent with our values. [It’s now] something which the growth strategy and the national policy of Japan itself says is vitally necessary to improve productivity and the earnings power of Japanese companies,” says Benes, who has been consulting closely with policy makers on the new governance proposals.

“Now it’s OK to talk about corporate governance as something that needs to be improved in order to confront the debt crisis and create more profitable companies and employment,” he adds.

Convincing key lawmakers of the value of having a corporate governance code — and that the Financial Services Agency (FSA) rather than the Ministry of Economy, Trade and Industry (METI) take responsibility for it — are two achievements of which Benes is particularly proud.

“Within a year, the FSA and TSE will have to come up with something substantial for a corporate governance code. It won’t be perfect, but we’re now going to have a very meaningful debate for the first time here between domestic institutions, foreign investors, Japanese companies and the government about how to make the code better,” says Benes. “There will be something to throw darts at.”

Many countries have a corporate governance code close to what the UK has with “comply or explain”. Rather than hard-and-fast compelling rules, if a company does not follow guidelines, it has to provide an explanation.

“A lot of Japanese people think that if you set that in print, and it’s in the TSE listing rules, most Japanese companies will absolutely follow it, because this is a shame-based society,” he adds.

Benes’ mission is now to get directors trained properly so they understand governance and their responsibilities. He regards this as particularly vital, “in a country where 85% of the directors are promoted by a boss to whom they feel loyalty, and to whom they cannot say ‘no.’”

He adds: “You have to teach the fact that, if you don’t speak out at a board meeting, later in a court of law that will be deemed to be acquiescence and in agreement with whatever was decided.

“And I don’t think most of the guys on the Olympus board really understood this,” says Benes. “Maybe some of them knew it in an abstract sense, but nobody had explained to them that you should be very afraid, because when you are sued as a director you are often looking at personal bankruptcy.”

Though there may still be a long way to go, the wheels of change have been set in motion, he believes.

“The changes underway are goring enough sacred cows that you can no longer go back,” he continues. “You can’t now go back and say that it’s no longer national policy to reduce cross-shareholdings, or it’s no longer policy that outside directors are a good thing.”

The issue of external directors is in some ways a microcosm of the whole problem. The Keidanren business lobby has stalwartly and successfully opposed even one compulsory outside director, while many of those advocating their introduction don’t believe they would make much significant difference anyway.

“You need independent directors who are financially literate, can actually challenge management, and are prepared to be painful — and in Japan it’s often difficult culturally to be painful,” suggests James Lawden, partner at Freshfields Bruckhaus Deringer in Tokyo.

“Olympus had three outside directors, who frankly were no help,” Lawden adds. “One was a doctor and he said something like, ‘How do you expect me to know about financial stuff?’ To which the answer is, ‘Well what are you doing on the board of a listed company then?’ Outside directors just on their own will not solve the problems.”

Indeed, Lawden, along with many others, have doubts whether a new code of governance or the other initiatives will really change corporate Japan.

“These measures are useful, but will they stop another Olympus? Maybe not.”

© Japan Today

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I bet there are plenty of Olympus type scandals out there just waiting to be exposed, LOTS of them!

There is a lot of smoke & mirrors when it comes to company books in Japan, a ton of stuff the powers that be NEVER want any light shone on!

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