Japan Opens Its Books
from May/June 2003
by Richard Evans
A remarkable thing happened recently in Tokyo. The senior management of JGC Corp., a big Japanese oil-services company, was meeting with a group of fund managers from the West. Long used to fuzzy financial targets and impenetrable accounting practices, the visitors braced themselves for yet another evasive presentation. What they got was just the opposite.
“It was impressive,” recalls Hansjorg Pack, senior Japan funds manager at DWS, Deutsche Bank’s asset-management arm and one of the largest investment houses in Europe. “The CFO accounted for every single yen of costs across every division of the company. He presented clear targets for cost reductions and the dates when those cuts would be achieved. Suddenly we were all listening and all interested.”
JGC isn’t alone. A host of Japanese companies are getting downright chummy with shareholders and prospective investors, opening up all kinds of financial data that were traditionally kept well buried. A study by Standard & Poor’s of 1,500 companies worldwide suggests that some Japanese outfits have actually overtaken their U.S. counterparts in various disclosure practices. Mitsubishi, NTT DoCoMo, and Orix outscored General Electric, Microsoft, and Qualcomm in how openly they spell out both ownership structure and shareholder rights, for instance.
Partly because of this new openness, more foreign companies are taking controlling stakes in Japanese corporations—something unheard-of until recent years. Britain’s Vodafone owns 67% of Japan Telecom, for example, and controls its board. France’s Renault has 44% of Nissan, and put in the CEO. Other Japanese companies are seeking governance advice from Westerners with board experience. Two of them are John Krol, former chairman and CEO of DuPont, and Ronald Hampel, who held the same jobs at ICI. Both men serve as outsiders on the advisory board of Teijin Ltd., a Japanese chemicals group.
Foreign investors have filled the vacuum left by Japan’s strapped banks, which since the mid-1990s have been dumping shares in sound companies to cover their losses in bad ones. “Japanese companies need to follow the money, and in order to do that it’s increasingly important for them to look outside of Japan,” says George Dallas, global practice leader of the Standard & Poor’s governance services group. Since the selloff by the banks began, foreign ownership of Japanese equities has risen from 10% to 18%.
Transparency has been part of the bait used to attract such investors. The yukashoken houkokusho, the filings that public companies must submit to the ministry of finance, now include stringent disclosure requirements. Among them: Companies must put out financial statements quarterly, instead of every six months as before.
They must also identify their top 10 shareholders, divulge the identity of any investor holding more than 3% of their shares, categorize shareholders by type (such as individuals or mutual funds), and disclose the specific rights associated with all voting and nonvoting share categories. Every company must also publish a calendar of important events and meetings.
Few U.S. outfits meet these requirements, according to the S&P study. Only 1% of companies in the S&P 500 identify shareholders by type or name those who hold more than 3% of stock; just 13% disclose all shareholder-rights information; and 22% provide shareholder calendars. Not one lists its top 10 shareholders.
One of the biggest converts to openness is automotive and engineering giant Mitsubishi—once the symbol of the secretive keiretsu system, in which affiliated groups of companies, including suppliers, manufacturers, and distributors, operated in opaque murk. In the S&P survey, Mitsubishi beat Eastman Kodak, Hewlett-Packard, and Microsoft on a number of counts, including what it discloses about its accounting methods. Mitsubishi has also reorganized its corporate structure, another move toward greater openness. “The company has simplified itself from having dozens of divisions to only four,” says Hansjorg Pack. In addition, “they have been more direct than a lot of Western companies in admitting where business units are failing and in providing precise performance targets,” he says.
While Dallas and other governance experts point out that stronger measures may be needed to make all Japanese companies comply fully with the new rules, some have already moved well ahead of what is legally required of them, driven in large part by their search for foreign investors.
The poster child for transparency may be Orix, a Tokyo financial-services outfit that trades on the New York Stock Exchange. In the S&P study, it and six U.S. companies tied for top honors in how they describe their ownership structures and shareholder rights. (Sharing first place with Orix were Baker Hughes, an oil-drill manufacturer; Bausch & Lomb; Calpine Corp., a producer of geothermal power; Delta Air Lines; Northrop Grumman; and Progress Energy, a utility.) Under chairman and CEO Yoshihiko Miyauchi, Orix has beefed up its investor relations department and does five road shows a year in the U.S. to snare new shareholders. The proportion of its foreign investors has risen from virtually zero a decade ago to around 40%.
The boards of Japanese companies are also undergoing change. Most big global concerns have cut their number of directors from an average of 10 to eight. More significant, the jomu-kai—the boards comprising companies’ top executives, which make the big decisions, usually in secret—may soon be losing a key chunk of their power. New legislation will enable management to replace internal auditors, traditionally appointed by the jomu-kai and often consisting of former insiders or jomu-kai cronies. The new reforms also clear the way for boards to set up committees overseeing auditing, executive compensation, and the nomination of new directors. Furthermore, if companies do establish such committees, the law stipulates that outside directors must constitute the majority of their members. Voluntary today, these changes may become mandatory within the next few years.
It’s hardly surprising that the practice of putting outsiders on the board was initiated by Sony, which named two outside directors in 1970. Today 655 other Japanese companies have followed suit, including most of Japan’s largest public corporations. Last year several hundred of them joined hands to launch the Japan Association of Corporate Directors, whose aims are to recruit outside board members and further improve transparency.
The rising sun is finally lighting up the books.
