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Setting the benchmark in corporate integrity

Japanese companies urged to reconfigure governance

A recent survey has indicated that investors are dissatisfied with the current system of governance commonly undertaken by Japanese companies, many urging for more comply-or-explain systems equivalent to that of EU-based companies

The survey undertaken by Sodali J-Eurus reveals that Japanese companies are widely perceived as falling short in their corporate governance procedures. The recordings, taken from the perspective of key global institutional investors, indicate that companies are expected more so to engage in a dialogue with shareholders if they are to rectify negative conceptions.

The survey polled those from the firms’ databases to accurately determine the conception of corporate governance and related procedures among shareholders. Moreover, the report closely examined both the methodologies and information sources drawn upon by investors in their measuring Japanese governance and in their voting shares at annual meetings. The results confirmed the commonly-held, though no less negative, perception of Japanese corporate governance. Having rated the performance of Japanese companies against those of rival developed markets, Japanese “corporate governance policy” received the lowest score of 1.79 on a scale of one to five.

“This result was not a surprise,” maintained Sodali chairman, John Wilcox. “What was surprising is that negative perceptions about corporate governance seem to have a spillover effect in areas where Japanese companies are on a par or do relatively better than their peers in other countries — environmental practices, sustainability, financial disclosure. The lesson is that Japanese companies are broadly impacted by investors’ governance concerns and need to work aggressively to counteract them.”

The report advises that Japanese companies should focus more on the role of the board, sustainability, environmental practices and social policy if they are to combat criticism.

Managing director of J-Erus, Yoshiko Takayama, noted that investors tend to favour the EU’s principles-based, comply-or-explain model of governance as opposed to the rules-based system commonly exercised in Japan. “This is an invitation to Japanese companies to meet the governance challenge on their own terms,” says Takayama. “Some companies may wish to consider voluntary governance reform, following the example of Toyota Corporation, which has been widely praised for its recent decision to add three outside directors to its board.”

Yoshiko Iwata, president and founding partner of J-Eurus moreover noted: “Whether or not Japanese companies adopt governance reforms, if they want to compete for capital in today’s global markets they need to explain how their governance arrangements and board practices serve shareholder interests.

“The Japanese consensus-based, bottom-up approach to running businesses is very different than the topdown, board-oversight model that prevails in the rest of the world,” she said. “Without judging which approach works better, Japanese companies need to understand how global investors think. The burden is on individual companies to explain how their businesses are managed and to correct misperceptions that can increase the cost of capital and lead to unnecessary activism.”

 

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