Japan still has a wild-west stock market
Saturday, 8 December 2007
Michiyo Nakamoto
When the operator of the main stock exchange and two of the market's most influential investors slam their country's corporate governance standards, surely something is amiss.
But that is what happened recently at a UBS conference in Tokyo when Atsushi Saito, president of the Tokyo Stock Exchange, Tomomi Yano, executive managing director of the Pension Fund Association, and Takumi Shibata, chief executive of Nomura Asset Management, raised the alarm about what they consider woeful standards of corporate governance in Japan.
The message was clear. Too many Japanese companies engage in practices that hurt their shareholders' interests. They were not talking about Japan Inc's penchant for hoarding cash and scrimping on dividends, which are bad enough. They were referring to behaviour that more blatantly undermines shareholder rights, such as third-party share allotments that massively dilute existing shareholdings, parent-subsidiary listings where there is a conflict of interest between the dominant shareholder and minority shareholders, and management buy-outs at shamelessly low prices.
Their outcry will strike a chord with investors, foreign and Japanese alike, who have discovered the hard way that despite being the world's second largest economy, Japan still has a wild-west stock market.
Third-party allotments, for example, continue to be abused, particularly by companies seeking to dilute unwelcome shareholders. In a recent case, MOC, a start-up wedding planner, announced a 10-into-1 stock consolidation and a massive issue of stock options that would increase the number of outstanding shares 30 times. For the 80 per cent or so of existing shareholders who own fewer than 10 shares each, the effect is to eliminate their entire shareholding.
Another controversial feature is the large number of companies that continue to hold dominant stakes in listed subsidiaries. Such parent-subsidiary listings per se may not be a problem, but too often there are apparent conflicts of interest, as in the case of NEC and its semiconductor arm, NEC Electronics. The subsidiary, 70 per cent controlled by the parent, has been making losses on chips it sells exclusively to its parent. The situation has prompted Perry Capital, a US fund, to call for NEC Electronics to become independent.
Shareholders have also been victims of management buy-outs conducted at very low premiums, in some cases after a particularly dismal profits warning.
Even the general shareholders' meeting is not always a reliable forum for shareholders to exercise their rights, as Safe Harbor, a US hedge fund, found this year when it made proposals to SNT, an automotive parts maker in which it owned 7 per cent. Safe Harbor's proposals were rejected but a court-appointed inspector later found that the votes had initially been miscounted.
Given this state of affairs, it is no wonder that GovernanceMetrics International, a corporate governance ratings agency, ranks Japan 38th out of 49 countries - behind Poland, Venezuela, Peru and Russia. Neither is it surprising that Tokyo has underperformed other main markets this year despite record earnings. If Japan wants to have a healthy stock market and a vibrant investment community, regulators and investors need to do more to ensure that bad practices are not tolerated.
Better corporate governance is crucial to revive confidence in the Tokyo market, both among foreign investors, who are losing patience with its underperformance, and Japanese retail investors, who have shunned their domestic stock market in favour of better-performing investments overseas.
Since the majority of TSE-listed companies do not even have outside directors, requiring companies to have independent board members would be a good start. But tighter regulation alone cannot address the fundamental problem - a widespread view among managements that the stock market is an easy place to raise capital with none of the accompanying responsibilities towards the people providing them with those funds - their shareholders.
Investors need to challenge that view. By speaking out, Messrs Saito, Yano and Shibata have taken a bold step in the right direction. As the government finalises plans to boost the country's status as a financial centre, it might bear in mind that a high standard of corporate governance would go much further than costly cosmetic changes to ensure Tokyo becomes the financial powerhouse it aspires to be.
When the operator of the main stock exchange and two of the market's most influential investors slam their country's corporate governance standards, surely something is amiss.
But that is what happened recently at a UBS conference in Tokyo when Atsushi Saito, president of the Tokyo Stock Exchange, Tomomi Yano, executive managing director of the Pension Fund Association, and Takumi Shibata, chief executive of Nomura Asset Management, raised the alarm about what they consider woeful standards of corporate governance in Japan.
The message was clear. Too many Japanese companies engage in practices that hurt their shareholders' interests. They were not talking about Japan Inc's penchant for hoarding cash and scrimping on dividends, which are bad enough. They were referring to behaviour that more blatantly undermines shareholder rights, such as third-party share allotments that massively dilute existing shareholdings, parent-subsidiary listings where there is a conflict of interest between the dominant shareholder and minority shareholders, and management buy-outs at shamelessly low prices.
Their outcry will strike a chord with investors, foreign and Japanese alike, who have discovered the hard way that despite being the world's second largest economy, Japan still has a wild-west stock market.
Third-party allotments, for example, continue to be abused, particularly by companies seeking to dilute unwelcome shareholders. In a recent case, MOC, a start-up wedding planner, announced a 10-into-1 stock consolidation and a massive issue of stock options that would increase the number of outstanding shares 30 times. For the 80 per cent or so of existing shareholders who own fewer than 10 shares each, the effect is to eliminate their entire shareholding.
Another controversial feature is the large number of companies that continue to hold dominant stakes in listed subsidiaries. Such parent-subsidiary listings per se may not be a problem, but too often there are apparent conflicts of interest, as in the case of NEC and its semiconductor arm, NEC Electronics. The subsidiary, 70 per cent controlled by the parent, has been making losses on chips it sells exclusively to its parent. The situation has prompted Perry Capital, a US fund, to call for NEC Electronics to become independent.
Shareholders have also been victims of management buy-outs conducted at very low premiums, in some cases after a particularly dismal profits warning.
Even the general shareholders' meeting is not always a reliable forum for shareholders to exercise their rights, as Safe Harbor, a US hedge fund, found this year when it made proposals to SNT, an automotive parts maker in which it owned 7 per cent. Safe Harbor's proposals were rejected but a court-appointed inspector later found that the votes had initially been miscounted.
Given this state of affairs, it is no wonder that GovernanceMetrics International, a corporate governance ratings agency, ranks Japan 38th out of 49 countries - behind Poland, Venezuela, Peru and Russia. Neither is it surprising that Tokyo has underperformed other main markets this year despite record earnings. If Japan wants to have a healthy stock market and a vibrant investment community, regulators and investors need to do more to ensure that bad practices are not tolerated.
Better corporate governance is crucial to revive confidence in the Tokyo market, both among foreign investors, who are losing patience with its underperformance, and Japanese retail investors, who have shunned their domestic stock market in favour of better-performing investments overseas.
Since the majority of TSE-listed companies do not even have outside directors, requiring companies to have independent board members would be a good start. But tighter regulation alone cannot address the fundamental problem - a widespread view among managements that the stock market is an easy place to raise capital with none of the accompanying responsibilities towards the people providing them with those funds - their shareholders.
Investors need to challenge that view. By speaking out, Messrs Saito, Yano and Shibata have taken a bold step in the right direction. As the government finalises plans to boost the country's status as a financial centre, it might bear in mind that a high standard of corporate governance would go much further than costly cosmetic changes to ensure Tokyo becomes the financial powerhouse it aspires to be.