Small boats floating in the rough seas of globalization—perhaps this is an accurate description of the vast majority of companies in Japan today. If you are unlucky, a small mistake in steering the vessel might cause it to be hit by a huge wave and sink to the bottom of the ocean. In order to avoid being shipwrecked, the boat needs to be equipped with the latest technology (global standards). However, the old captain is not familiar with the new equipment and shouts, “We don’t need new equipment to steer a boat because the equipment we have is enough for us!” Japanese companies are now pursuing a variety of measures in order to change such attitudes.
One of the key concepts here is “improving corporate value.” The critical task for shareholders is to increase the amount of corporate value of companies. If we take an example of external directors (or external auditors), it is easy to imagine that their appointment would lead to the increase of corporate value, however, empirical research has shown that appointing full-time external directors does not immediately lead to increase corporate value and that corporate value increases only under certain circumstances. While the reasons for this have yet to be debated, the traditional route to promotion at Japanese companies has been for the employees to become directors (executives). If the traditional Japanese corporate culture still pervades in which the board of directors is controlled by promoted former employees who have curried favor with the president, it would be possible to explain the results of the above empirical research by adding “Japanese corporate culture” to the variables.
On the other hand, the latest trend is to add regulation through so-called “soft law,” instead of relying solely on corporate law. The Corporate Governance Code, which has just been published, was formulated by Japan’s Financial Services Agency and the Tokyo Stock Exchange (TSE) and targets listed companies. The aim is to face squarely up to the fact that productivity is lower at Japanese companies than European and American companies, and to strengthen corporate governance in order to increase their medium to long-term profitability and productivity. The content of the Corporate Governance Code is very wide-ranging, but the items that have been commonly discussed in the newspapers and other media are appointment of several independent external directors and strengthening of disclosures about “policy shareholdings” of stock held for non-investment purposes, including the goal of maintaining a trading relationship (so-called “cross-holdings”). In Japan, there was a tradition of listed companies possessing cross-holdings of shares and corporate culture of using cross-holdings to establish secure status of management teams at each other’s companies. However, from the perspective of ordinary shareholders and investors, such a corporate culture does not contribute to corporate efficiency and does not help to increase the corporate value. The aim of the Corporate Governance Code is to carry out proper assessment and monitoring of managers as well to eliminate so-called cross-holdings, which are economically irrational, through implementation of the above policies. The strategy is to globalize Japanese companies through efficient operation.
The “Japanese Version of the Stewardship Code” is another innovation. Set out by the Financial Services Agency, the Japanese Version of the Stewardship Code is a code of conduct for institutional investors that calls for the promotion of sustainable growth at companies through dialog between institutional investors and the companies being invested in, at which corporate reforms are expected to go forward as a result. By diversifying channels for communicating to the companies, it is likely that the Code will have the effect of promoting the increase of corporate value.
These two policies encourage a transformation in Japan’s traditional corporate culture and promote further improvements in corporate value.