Ulrike Schaede (Professor of Japanese Business at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego) urges Japanese companies to follow the German rather than US corporate governance model in her latest article for the Nikkei Online. She suspects that the target of 8% minimum ROE for Japan’s listed companies, as proposed in August of this year by the Ito Review for the Ministry of Economy, Trade and Industry, was set with reference to the US average of around 15% ROE. While supporting an improvement in ROE for Japanese corporates, she argues that comparing ROE in two such different economies is like comparing the ‘moon to a turtle’.
Similarly she argues that dividend payout ratios (usually criticised for being way too low for Japanese companies) cannot be meaningfully compared across industries, let alone across countries.
In fact Japan’s commercial law, dating from the 19th century, was based and German and French laws. The German chairman of the executive committee is similar to the Japanese President of a company – the legal representative of a company. Their decision making powers are far more limited than the American CEO. Over 50% of American CEOS are also the chairman of the board, but this dual post has come under heavy criticism recently.
In Germany, it is illegal for an executive to be both the chairman of the executive committee and also on the board of directors, unlike in Japan and the USA. Furthermore, if the company has more than 2000 employees, there must be a representative of the company union on the board.
Schaede also thinks the frequency of board meetings in Japan – every month – is a problem, if external directors who need to travel long distances to get to them, are to be able to attend. She recommends meeting quarterly, but for a full day rather than just 3 hours and that the strategy of the company, rather than reports on past events should be discussed.
Such reforms would allow Japan to set a new style of corporate governance in Asia, she believes. But if the main driver for reforming corporate governance is to attract foreign shareholders or keep them happy, it seems to me, from my recent conversation with a woman who invests funds on behalf of high net worth individuals, that the US model is the one most investors judge by. She has never invested in Japanese companies, because the dividend pay out is too low. She’s not interested becoming a shareholder in stakeholder oriented companies.
