Japan’s corporate governance reform stalls

After a strong start, improvements to Japan's corporate board structure have stalled. Companies with the worst structures are showing little or no improvement in terms of reforms


CORPORATE governance across Japan’s companies have shown marginal improvement this year, with some of the companies with the worst board structures doing very little to boost governance.

A new report by equity analysts at Jefferies reveal about a third of companies have not been compliant to the country’s recently revised Corporate Governance Code. Jefferies warn the bottom half of companies in Japan’s Topix 500 could take decades to improve if the pace of reform does not accelerate significantly.

“We believe that this is because obstructive companies that are opposed to reform were able to take key numerical targets out of the code revision this year,” say analysts at Jefferies. Jefferies has published a report on Japan’s board structure reform in which it rated the boards of all TOPIX 500 index companies.

Jefferies cited the watered-down version of the Corporate Governance Code. The final revision to code has excluded the requirement for a company board to have a third of them as independent directors and get at least one female director.

Both revisions would have affected Japan’s obstructive companies or companies that are resisting to comply with the new code, analysts note. Ninety-nine percent of proactive companies are already compliant with the minimum one-third independent director proposal. In comparison, only 12% of obstructive companies would currently be in compliance if that requirement had been adopted.

In order of size of improvement in 2018, the metrics were outside influence (+3%), shareholder alignment (+2%), skills (+1%), diversity (+1%) and entrenchment (0%). The overall increase is two to three percent. There were not many cases of big improvements at specific companies over the past year. To the extent that there were any big improvements, they were not among the bottom companies. Rather it was average or good companies getting better. This is a disturbing trend as it indicates that there is limited pressure on the worst companies to improve, says Jefferies.

At the current pace of change, it would take 10 years for the average company to improve its score from the current +40 points up to +100 points, a level that Jefferies consider to be the minimum acceptable score. “Clearly this pace is too slow. If much greater pressure is not exerted on companies to reform, we believe that the governance reform movement could lose not only its momentum, but also its credibility,” it added.

Despite the results of the study, the analysts note that they remain hopeful “because activism by shareholders is on the rise”.

Moreover revisions to the code included a process for evaluating and potentially dismissing the CEO on the basis of weak business results. The second revision is on the reduction of cross-shareholdings.

Jefferies also note activists and the new Keidanren leaders could be catalysts. Jefferies expect more shareholders to become activist in the coming year and for existing activist to become more aggressive. “The team is cautiously optimistic that under the new leadership, Keidanren’s opposition to governance reform may decline. Future revisions may strengthen the Code enough to reinvigorate the pace of reform,” analysts say.



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12 Sep 2018


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