This article is about reform in Japan.
There has been an unusual amount of scandals in the past year (Olympus, Daio Paper, AIJ, TEPCO, and now Nomura). Although the bad guys won in the short-term, perhaps there will be some fundamental changes after all.
AGM attendance at record
According to the Nikkei Shimbun, due to the Olympus and other scandals (Daio Paper), ordinary shareholders are now suspicious about how companies are being managed. This is driving an increase to a record level of participation in annual general meetings in Japan. The largest increases reported so far have been at Kansai Electric, Toyota, and Docomo. In my opinion, this is not just Olympus, but also Japanese investors feeling that the country is in decline overall, with former champions now hemorrhaging money and losing out to Koreans and Chinese. The last year and a half has been a horrific experience for corporate Japan.
External director boom
Also, there has been a notable increase in external director appointments, in fact you could say there is a boom in external directors. E.g. JT, Suzuki, Sumitomo Kagaku, Seiko Epson appointed additional external directors; and Hitachi, who famously appointed a guy from 3M – first gaijin for that company. The ISS has declared that from 2013 it will vote down top management appointment proposals at AGMs of companies which have not got external directors.
Small investors becoming (relatively) assertive
One interesting story was that for the first time ever, Japanese investors are scrutinizing the appointments to the board at AGMs. At one company, there were 30% of investors who voted against a takeover defense and director appointments. Extraordinarily, at another company, shareholders got together before and AGM and put forward the opinion to management that auditors should not receive retirement payments, this resulted in the company removing the AGM proposal for such payments from the agenda. The lesson here is that if you want to shoot down a proposal at and AGM, perhaps it is better to discuss it with management beforehand, and get them to kill the proposal before it even appears at the meeting itself.
One other benefit from the Olympus fraud is that the Tokyo Stock Exchange is planning to make it easier to boot out companies which fudge the books.
Unexpected revision of pension rules good for companies
Separately, the final report on the missing cash at AIJ was released yesterday, and it found that the fund was “run by amateurs” (hardly surprising), and recommended sweeping changes to the foundation of the Japan pension system. At present, companies get together with peers in their industry and pool their assets into a pension fund. If a large member of the fund goes bust, then all the remaining members are on the hook to the Ministry of Health, Labour, and Welfare for the underfunded part. Obviously, this is a series of dominoes similar to overleveraged banks lending to one another – it is a situation primed for serial failure.
Also, by allowing companies to not have to worry about this risk, the government is effectively giving companies a put option, and this will effectively lead to increased money flow in the economy – in a similar way to reducing reserve requirements at banks – by reducing this risk, companies will have more of their capital available to invest.
The other important recommendation was to loosen the rules on reducing retirement payouts to former staff. At present, companies need to get an overwhelming majority of retired employees to vote in favour of a reduction in their own pensions in order to take such a move. Obviously, this would be good for companies and bad for retirees. However, this being Japan, a bailout of some sort for the old folks is quite likely in such a case.
Is not clear when the changes will come into effect, but by the sounds of the newspaper article, the Ministry is on the case and will issue a Notification and Ordinance (the two ways of getting things done in Japan) at some point.
What is surprising, is that the report was originally supposed to be talking about problems with funds, but it ended up talking about retirement. The issues that it is addressing have been on the agenda for ages, and it just may be the case that it was a politically expedient moment to move ahead with this reform.
One important thing to note about reforming Japan, is that when it happens, and if it gains momentum, then it will be a steam train, as everybody will try to climb aboard.
As for Nomura, where Chinese walls turned out to be Japanese walls, don’t get your hopes up – insider trading has been great business for decades, they are hand-in-glove with the fist of god (the Ministry of Finance), and they are not even involved in manufacturing, so how much harm can it do anyway?
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