Right on cue, The Wall Street Journal published an editorial on June 2nd entitled, “Abe Topples Japan Inc.; A new consensus for corporate governance reform.”
Here is an excerpt:
“Japan often resists change—and then embraces it all at once. Witness the country’s first corporate governance code, which came into effect Monday. Prime Minister Shinzo Abe’s push to restart productivity growth and unlock value in Japanese companies is toppling the shibboleths of Japan Inc.
For decades the iron triangle of managers, bureaucrats and politicians stonewalled demands for minority shareholder rights. Japanese companies supposedly made better strategic decisions because they could ignore meddlesome investors and their demands for short-term profits. Managers ran firms as private fiefdoms largely for the benefit of lifetime employees.
This didn’t matter much during the high-growth years, as heavy investments in capacity made economic sense. But once the bubble burst in the early 1990s, the weakness of the system was exposed. Managers hung on to misused assets instead of exiting unprofitable businesses. The economy stagnated.
It took more than a decade before Tokyo cleared away the worst of the zombie companies and repaired the banking system. But the economy didn’t recover, as companies sat on cash rather than invest or raise wages.
Now the Abe government has embraced better corporate governance as a way to force Japanese firms to restructure and invest. The new code requires boards to comply with requirements for independent board members and greater transparency, or else explain why they haven’t.
The voluntary nature of the code makes it sound lenient to American ears. But early indications are that it will have real force, in large part because the government is using it as a tool of moral suasion. The letter of the law in Japan is often less important than the meaning society gives to it, and it bodes well that some Japanese companies are treating it as a matter of prestige.”
It is worth reading the entire article: