Define Corporate Governance, Return of Cross-shareholdings, TSE as Policymaker, Resistance to Reform | Print |
Session II Q&A
  • Mr. Hiroaki Niihara, Director, Corporate System Division, Economic & Industrial Policy Bureau, Ministry of Economy, Trade & Industry (METI)
  • Mr. Kazunari Tomita, Chief Representative & General Manager, New York Representative Office, Tokyo Stock Exchange, Inc.
  • Mr. David Makman, Counsel, Howrey LLP
  • Moderated by Drew Edwards, Vice President, Advisory Research, Inc.

        


Defining corporate governance
During the Session II Q&A period, the panelists were asked to describe the fundamental differences between the definition of ‘corporate governance’ in Japan and the West. Mr. Niihara started by saying that it may not be meaningful to discuss the differences among the definitions but that the key idea of corporate governance is how an investor gets to control the company in which he has invested, the relationship the company wants to maintain with its investors. Essentially, Mr. Niihara does not see much difference in the definitions, but regardless, there is still a need to change the way a company is managed in Japan to better protect the rights of investors. “METI is really interested in improving corporate governance in Japan,” said Mr. Niihara, “and within a year or so, we want to see some results.” However, METI does not necessarily aim to make the Japanese system close to that in the U.S. It plans to take the positives practices from around the world, including other parts of Asia, and incorporate them into the Japanese system. Mr. Tomita agreed that the purpose of corporate governance in both Japan and the U.S. is the same, which is to maximize shareholder’s value and protect shareholders rights.

The return of cross-shareholdings
The next question asked whether there is a comeback of cross-shareholdings. Mr. Niihara started by saying the reason companies tried to hold each other’s shares in the past was to keep these shares stable by essentially preventing their holders from really exercising their rights. With the current introduction of outside directors and auditors, companies now have more interest in keeping their shares stable, which is why there is a comeback of cross-shareholding. Mr. Tomita shared that the TSE is very concerned about the comeback of cross-shareholding, since it can be detrimental to good corporate governance. TSE is considering working to persuade companies to abandon such cross-shareholdings. Mr. Makman noted that while there seems to be a general consensus that cross-shareholding is not a good thing, there seems to be little knowledge of how to resolve the issue. He pointed out that when shareholders are getting their desired returns on investment and share prices are going up, the issue does not matter as much. But it becomes a problem when cross-shareholding becomes a way to support corporate assets. To see whether this is actually a problem, voting results from general shareholders meetings could be publicly disclosed to see how cross-shareholders are voting. There may be pushback to protect the privacy of shareholder votes, but Mr. Makman said he does not currently see any strong reason that information should be confidential.

TSE as policymaker?
Mr. Tomita was then asked whether TSE could act as a policy maker or sorts by having corporate governance requirements for its listed companies. Mr. Tomita said that while this is a possibility, the TSE has not yet decided the future direction of the corporate governance of its listed companies. TSE’s basic attitude regarding the corporate governance of its companies is to encourage the public disclosure of each company’s corporate governance state, which TSE hopes will pressure each company to voluntarily improve their own corporate governance.

Resistance to corporate governance in Japan?
The panel was asked whether they thought Japanese companies resisted corporate governance reform to defend their cash, for managerial interests, or due to a deeper cultural issue. Mr. Makman stated that, to the contrary, he has received very positive feedback from Japanese companies who feel corporate governance reform is “common sense.” But any manager whose company may be bought out from under him/her or may loose his/her job due to shareholder vote may resist reform, he said. Because corporations have multiple stakeholders with different interests, he feels the courts are the best way to resolve disputes over people’s rights with respect to that property.

Mr. Tomita noted that these changes are pretty dramatic and that companies need time to change. Companies are currently in the education process, and these changes will need time to be effective. He does believe, however, that the changes will happen.

Mr. Niihara relayed that whether or not companies have a resistance to corporate governance reform, it is necessary to have an outside director on the board. While he stated earlier there is little difference in the definition of corporate governance between Japan and the West, the definition of an independent, outside board director or member is very different. In Japan, a director from a parent company that sits on the board of its subsidiary company would be considered an outside or independent board member, even though he/she really wouldn’t be. In the U.S., such a board member would not be considered outside or independent. Also in Japan, a board member that is a family member of a family-owned company would be considered an outside board member. Mr. Niihara said it would be much more effective if Japan changes its definition of outside or independent board member to resemble the U.S. or British definition.


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Note: Mr. Niihara delivered his answers in Japanese, which were interpreted into English. The above summary is an adaptation of the speaker’s presentation. Contents and quotes may not be entirely accurate.