Matthews Asia's Kenichi Amaki assesses the pace of change in Japan.
The need for an improvement in Japanese corporate governance is not a new topic, and it has received a lot of attention in recent years. However, change never happens quickly in Japan and some investors are now asking whether it's making decent headway.
Corporate governance progress should not be underestimated: According to a recent survey by Japan Investors Relations Association, some 60% of companies said they now have a capital policy in place - up from 32% in 2015 - while some 57% have a return on equity (ROE) target. In comparison, when I visited Japanese companies 15 years ago, many managers wouldn't know what ROE was and what it meant for investors. Today many of them do have written ROE targets in their presentation materials and understand that it is important for investors.
The same survey also showed that some 44% of companies are now aware of the cost of equity, though I somewhat doubt that this is true. Five to 10 years ago, the cost of equity was a completely foreign concept to the typical Japanese company -- for them equity was free money, money they didn't have to pay back. Nowadays, some at least, know there is a certain cost.
However, we should not tar all companies with the same brush: Those companies that have large overseas operations, or derive a large portion of their revenues from outside of Japan, tend to have better corporate governance practices in place. This is because they operate in environments in which they are required to follow governance rules. Domestic firms, which have not been subject to the same extent of foreign competition, tend to be unaware -but not ignorant- of the generally accepted corporate governance practices.
Recently, we have been able to engage with some companies that previously did not meet with investors, and I have also witnessed some improvement in how companies disclose information.
Company managers appear to be thinking more deeply about the business' capital structure, which is being demonstrated in their share buy-back announcements.
Meanwhile a lot of companies have multiple independent directors these days, which is impacting the nature of conversations at Japanese board meetings. It's true that many companies are just trying to fulfil the number that is stipulated by the corporate governance code, but at least there is now some awareness that corporate governance can no longer be ignored. It is slowly, but surely moving ahead and it is likely to lead to improved returns on capital going forward.
We are already seeing higher dividends and stronger share buybacks, but we still have a long way to go. Japan's corporate governance reforms might not be charging ahead, but as we all know from the story of the hare and the tortoise, speed is not always the key factor in winning. The truth is that change takes time in Japan and investors will need to be patient to reap the rewards.
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