Japan: Corporate Governance: A Revolution in the Making

The silence of large Japanese shareholders in Olympus in 2011-12 as the firm plunged into the country’s biggest accounting scandal in decades was one of the most worrying features of the affair. It was left to two foreign fund managers to make public demands for answers after Michael Woodford, the optical-equipment maker’s former president turned whistle-blower, sounded the alarm.

But turning a blind eye is about to get harder. Japanese asset managers will this year sign up to a new stewardship code introduced by the government of Prime Minister Shinzo Abe. Shareholders will be strongly encouraged to monitor firms closely, and speak up when needed.

Another reason for the Olympus scandal was a board of directors packed with “yes-men”. Here too, the government plans to take action. Mr Abe’s Liberal Democratic Party (LDP) will soon draw up new corporate-governance rules, including guidance for firms to have independent directors on their boards. Such a code, voluntary yet forceful (since firms would have to explain any variation from it), would be Japan’s first. It would give backbone to the stewardship rules. For hundreds of Japanese firms and their shareholders, the combination of the two would be little short of revolutionary.

For now, Japan’s corporate governance lags that of even some emerging economies. In 2013 nearly 600 of the 1,400 or so largest listed Japanese firms still had no outside directors, whereas South Korea, China and India all require them. Companies listed in New York must give over half their board seats to outsiders. In Japan, only a tiny handful have at least three external directors, generally the minimum required to wield real boardroom influence. Olympus had three, but their obedience to the then chairman recalled “children in a classroom”, according to Mr Woodford.

The lack of supervision of Japanese top management contributes to chronic underperformance. The firms in the TOPIX 500 index had an average return on equity in 2012 of 7%, compared with over 15% for American and European companies.

Source: http://www.economist.com/news/business/21601557-long-last-japanese-firms-seem-be-coming-under-proper-outside-scrutiny-revolution?zid=294&ah=71830d634a0d9558fe97d778d723011d