Despite nearly 10 years of Corporate Governance (“CG”) reform[1] in Japan, a large number of companies have regrettably continued the practice of Governance washing [2].  While the CG Code, introduced in 2015, requires companies to submit a CG report (“Report”) to the stock exchange that they comply with the codes, in actuality many  do not.  As there are no penalties for this behaviour, the circumstances remain unchanged and CG remains poor. 

Some key issues to be highlighted are:

• Amakudari [3], practice where a board position is occupied by, or is prepared for, individuals from a particular institution or group such as the central bank, business clients etc. Rubber stamping, where a nomination committee exists but for the purpose of holdings meetings once or twice a year to unconditionally approve the CEO’s proposed candidates.

->But the company reports that they are electing the director candidates in an appropriate manner. And it is reported that they have established a nomination committee properly.

• Cross-shareholding [4], some directors are keen to have cross-shareholdings relationships to maintain a cohort of stable friendly shareholders to help preserve their positions.

->But the Report states they vote based on their proxy voting policy (although neither voting policy nor result is published)

[1] The Japan Revitalization Strategy published in 2013 by the Japanese government made strengthening CG and enhancing ROE a priority.  

[2] The governance equivalent to greenwashing where companies make an attempt to make a business seem committed to CG when it is not.

[3] Normally defined as the institutionalized practice where senior bureaucrats retire to high-profile positions in the private and public sectors as a form of ‘compensation’ for those who miss out on promotion.  A similar practice can occur in the private sector.

[4] A system of inter-locking share ownership between publicly traded Japanese companies

StraCap has identified several “Governance washing” cases, for example: -

• Questionable Amakudari relationship between a securities finance company and the central bank of Japan(“BOJ”) and the stock exchange where a succession of CEOs are ex-BOJ members.  There is also a practice where the ex-CEOs were tenured as senior advisors.
• The case helps highlight the negative effects of Amakudari as the company continues to be plagued with a 1) lack of or inappropriate ESG disclosure, 2) poor stock valuation over the long-term.