Recent Changes in Corporate Governance in Japan | Print |
Session II: Perspectives on Corporate Governance and M&A in Japan
  • Mr. Hiroaki Niihara, Director, Corporate System Division, Economic & Industrial Policy Bureau, Ministry of Economy, Trade & Industry (METI)

Mr. Niihara presented on recent changes in the corporate governance landscape in Japan, some differences in Japan and U.S. corporate governance laws, and a new element being introduced to companies in Japan.

More communication between companies and investors
One of the most significant changes in recent Japanese corporate governance is that companies are now communicating more openly with institutional investors. Traditionally, Japanese management executives did not have much communication with shareholders. They didn’t share visions with shareholders, and there was a somewhat weak sense of community among Japanese businesses. This, he said, led to the erroneous idea that management was ignoring shareholders. But this is rapidly changing.

Comparing the general shareholders meetings that took place last June to those held this June, Mr. Niihara described how the attributes of shareholders who made proposals changed. Last year, funds and investment managers, or institutional investors, made 48% of proposals, but this year the proposals submitted by individual shareholders accounted for 74% of all proposals, while institutional investors made only 13% of proposals. Japanese individual shareholders were more active this year. Regarding the content of shareholder proposals, 43% of proposals made last year posed increases to dividends. But this year, such proposals went down drastically to about 20% of all proposals. The reason for these changes, Mr. Niihara explained, is because prior to the general meetings this year, the top management of many companies communicated with institutional investors and made adjustments to their proposals before the general shareholders meetings. When companies finally presented their proposals to shareholders during the meetings, the prior discussions made it more likely that institutional investors would agree with contents of the proposals. This constitutes a very large change, Mr. Niihara said, for items like investment policy and how much stock companies will buy back.

Another area where companies are now more fully communicating with institutional investors in advance is regarding takeover defense measures, where a company would try to acquire stock acquisition rights from the bidder in exchange for a certain economic value. According to the Pension Fund Association (PFA) in Japan, the ratio of votes exercised against the introduction or renewal of takeover defense measures last year was only 1.5%, or 2 out of 137. But this year, that figure went up drastically to 38.5% this year, 40 out of 104. This is because in March of this year, the policy that was to be proposed was made very clear. At the same time, the investors made it very clear they were going to oppose such an introduction. So overall, companies are now communicating more with investors to be able to change the contents of a proposal in advance of the general shareholder meetings and to more fully disclose policies they will be proposing.

M&As
A second change regards company acquisitions, or M&As. Outside of recent weeks affected by the financial crisis, the number of M&A cases in Japan has been on the rise due to some drastic changes to the legal system in Japan. For 2008, the purchase of Japanese companies by a foreign company or foreign fund has declined, but reversely, there is an increase in the number of Japanese companies trying to buy foreign companies. Historically, Japan has not had many hostile takeovers, but being cash rich, Japanese companies are now very enthusiastic about taking over other companies and are acquiring the skills to do so.

Mr. Niihara then described METI’s stance on takeover defense measures. Because properly working capital markets are indispensable to the growth of corporate value, METI seeks to take very strict measures to ensure the proper function of capital markets. The purpose of takeover defense measures is to protect shareholders’ interests. Introducing a takeover defense measure can stop the takeover temporarily to allow communication between the company and the acquirer. But if a takeover defense measure is implemented, it diminishes the interest of shareholders trying to sell their shares. While takeover defense measures risk decreasing shareholders’ interest, they do try to maximize stakeholders’ interests as a whole. But even so, paying money or the equivalent of money to stop the acquirer from purchasing a company should not be allowed because it ignores proper function of capital markets.

Differences between the Japanese and U.S. systems
While many corporate governance laws in Japan are similar to those in the U.S., some are quite different. One big difference is in the authority of the shareholders meetings. In Japan, it’s rare that shareholders exercise many of their rights, but rights exercised during shareholders meetings have much authority. An example of where this difference could have great effect is votes on dividends. In the U.S., board members decide the dividend, and if a decision is made during a shareholders meeting, it is not legally binding. However in Japan, even if a company says it wants to pay a certain dividend, it has to be decided at the shareholders meeting with over 50% of votes, and companies are not supposed to override a decision made at a shareholders meeting. Also, articles of incorporation can be changed with 2/3 agreement or more at a shareholders meeting, even if the company objects to it. The term of office of directors is also decided at the shareholders meeting. Japanese shareholders rarely implement these rights, but if they do, the rights are very strong.

New element in corporate governance
Currently, independent board members are being introduced to the Japanese company system. In Japan, most board members of a company come from within the company. There is concern that outside board members will not understand the business of a company and would not be able to make much contribution as a result. However, METI believes companies need to gain the trust of their investors and should have very trustworthy, independent, outside board member(s) in the company to monitor management on behalf of those investors. Those outside board members may not have significant knowledge about the company’s business itself, but as long as those individuals have executive management experience, they will be able to hold the executive management of the company accountable to investors.

In closing, Mr. Niihara consented that the formalities of governance do not have strong correlation to the performance of a company. But Japanese companies need to consider that globalization is an indispensible factor for growth and that in order to grow, it is not possible for Japanese companies alone to operate under a different system. To support the growth of Japanese companies, the government will continue working to improve corporate governance in Japan.


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Note: Mr. Niihara delivered his presentation in Japanese. The audience was provided with simultaneous English interpretation. However, some of the content here may not be an accurate representation of what was originally said.

The above summary is an adaptation of the speaker’s presentation. Contents and quotes may not be entirely accurate.