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In-depth Corporate Governance: Can Japanese Business Adapt to a New Era?
Change Brewing in the Boardroom: A Proxy Adviser Assesses Corporate Governance in Japan

Takenaka Harukata [Profile]


Proxy advisers are a new phenomenon in Japan, where companies are only now beginning to treat shareholder interests as a serious priority. In an exclusive interview, Executive Director Ishida Takeyuki of Institutional Shareholder Services in Japan offers his unique perspective on the reforms that are slowly but surely changing the face of corporate governance in Japan.

Ishida Takeyuki

Ishida TakeyukiExecutive director at Institutional Shareholder Services in Japan. Born in Ishikawa Prefecture in 1968. Earned his master’s degree in International Affairs from Johns Hopkins University School of Advanced International Studies. In 1999, began work as a research analyst for the Investor Responsibility Research Center in Washington, DC, covering Japanese shareholder meetings. Joined ISS in Japan in 2005 and was appointed head of Japanese Research in 2008. Ishida has also served on the Financial Services Agency working group that drafted Japan’s Principles for Responsible Institutional Investors (Japanese Stewardship Code).

INTERVIEWER Tell us about your company, Institutional Shareholder Services. What kind of company is ISS, and what sort of services does it provide in Japan?

ISHIDA TAKEYUKI Our clients are institutional investors, and we provide information and advice to help them cast their vote at annual shareholder meetings. Having purchased stock in a corporation, they have the right to vote on proposals and appointments and other items on the ballot at the annual shareholder meeting. We do research to determine whether various ballot items are in the shareholders’ long-term interests and provide voting recommendations on the basis of that judgment. We publish research reports detailing our recommendations for each company. ISS launched operations at its Japan office in 2003 in order to localize its research operations and provide better service to clients.

INTERVIEWER The amended Companies Act enacted in June 2014 has brought some new ideas to corporate governance in Japan. Can you give us your views on how governance has changed as a result?

ISHIDA I think Japanese ideas about corporate governance have changed in the past few years. Until pretty recently, people spoke of corporate governance in a manner more or less synonymous with “compliance.” Now there’s a lot more discussion of governance on a level that’s meaningful to investors. But I don’t think that the amendment of the Companies Act is the reason for that. I think there’s been a change in the environment that happened to coincide with the legal changes.

Nowadays, talk of acting in the “best interests of the shareholders” comes a bit more naturally from the mouths of Japanese executives. The same goes for terms like ROE [return on equity]. In the United States, on the other hand, the idea that the board of directors is responsible to the shareholders is pretty much taken for granted. In Japan, corporations are gradually  reaching the stage where they are receptive to the idea. The governance climate is gradually changing, and I sense that foreign investors’ perception of Japanese business is changing as a result.

INTERVIEWER How have Japanese corporations been able to ignore their shareholders all this time?

ISHIDA It’s mainly because of the enormous role of bank lending in corporate finance, along with the impact of cross-shareholding and permanent shareholders.

I’ve vetted thousands of candidates for the position of outside director, and the vast majority of them have been former bankers. Candidates from investment houses, on the other hand, are comparatively rare. In Japan, there’s long been an assumption among businesspeople that the best financial and business minds are concentrated within the big banks, and while that dogma is gradually giving way, it’s still pretty deeply entrenched. That’s a reflection of the influence of the banks in a debt culture like Japan—as opposed to an equity culture like the United States.

Japanese business also has a tradition of cross-shareholding, in which companies with long-term relationships hold onto one another’s stock. This isn’t like buying shares as an investment; they cross-hold shares because they have this relationship, so it’s like putting the cart before the horse. With that kind of ownership structure, the company doesn’t have to worry about making the shareholders happy. Other investors might grumble, but as long as the company has all those stable shareholders, management doesn’t need to listen; it can just keep doing what it’s always done.

INTERVIEWER The revised Companies Act requires companies listed on the stock exchange to appoint outside directors or else submit an explanation as to why they haven’t done so. What’s your view on the impact of this provision?

ISHIDA According to our latest survey, about 90 percent of Japanese companies have brought in at least one outside director, so the impact has been quite substantial in that sense. And one thing I want to emphasize here is that the government’s approach to this reform has given Japanese executives plenty of time to think about the purpose and significance of independent directors before appointing them. If it had simply mandated outside directors by regulatory fiat, the number of such directors would have soared overnight, but it would have been a pro forma change without real meaning. If you have a company with a board of directors that functions as an executive committee, and you suddenly force it to bring in outside directors, you’re putting outsiders in a position of weighing in on day-to-day operational matters that they know nothing about. In that sort of situation, the outside director can’t make a meaningful contribution.

But I think the changes we’re seeing now are meaningful because companies have been able to move at their own pace and appoint outside directors after first considering how those directors will function on the board. As a result, they’ve been taking steps on their own initiative to optimize the board, adapting everything from meeting agendas to the frequency of meetings. You can mandate the appointment of outside directors, but you can’t mandate the frequency of board meetings or their agenda. And most important, you can’t mandate new attitudes or intentions.

  • [2015.12.17]

Professor at the National Graduate Institute for Policy Studies. Graduated from the University of Tokyo, where he majored in law. Joined the Ministry of Finance. Subsequently received his PhD in political science from Stanford University. Author of Sangiin to wa nani ka (What Is the House of Councillors?) and other works. Member of the editorial committee.

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  • Toshiba Accounting Scandal Highlights Issues in Corporate GovernanceThough Toshiba had actively adopted corporate governance practices, an independent investigation found that the company’s top executives were complicit in fraudulent accounting. As Japan continues to bolster its governance rules, the incident serves as a lesson for other firms.
  • Toward a Multi-Stakeholder Model of Corporate GovernanceOver the past two decades, Japanese corporations have moved away from an outdated governance model rooted in keiretsu relationships and “main bank” financing toward a more shareholder-oriented system. Amid this ongoing shift, economist Hanazaki Masaharu calls for a new emphasis on social responsibility and sustainability through wide-ranging dialogue with internal and external stakeholder groups.

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