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Cablegate: Corporate Governance Report Rebukes Japan's

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P 160847Z MAY 08
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UNCLAS SECTION 01 OF 02 TOKYO 001353

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E.O. 12958: N/A
TAGS: EINV ECON OECD JA
SUBJECT: CORPORATE GOVERNANCE REPORT REBUKES JAPAN'S
STAKEHOLDER CAPITALISM

REF: TOKYO 408

1. The Asian Corporate Governance Association (ACGA)
released its first "White Paper on Corporate Governance in
Japan" May 15 in Tokyo. The paper, endorsed by seven leading
global pension funds, highlights six areas in which
institutional investors believe Japanese corporate governance
must be improved. The paper also provides detailed
recommendations in each area. The ACGA's six policy
priorities are:

- Reaffirmation of the principle of "shareholders as owners"
of listed companies;

- More efficient use of capital by Japanese firms;

- The need to strengthen systems for independent supervision
of corporate management;

- Legally binding "pre-emption rights" to prevent dilution
of shareholdings through uncontrolled allocation of newly
issued shares to third parties;

- Reconsideration of the trend toward adopting corporate
takeover defenses, but if such defenses are necessary,
adoption of Canadian-style "shareholder rights plans" rather
than "poison pills";

- Greater transparency in shareholder meetings and proxy
voting.

Embassy has forwarded a copy of the White Paper to EAP/J.

2. The paper was presented at a two-hour, standing-room only
press conference. The White Paper's author, ACGA Secretary
General Jamie Allen, explained its main theme is "sound
corporate governance is essential for creating a globally
competitive corporate sector in Japan, as well as for the
long term growth of Japan's economy and capital markets."
Allen noted "corporate governance in most Japanese listed
firms does not meet the needs of the company's stakeholders
or the country at large." There is inadequate supervision of
corporate strategies in the vast majority of Japanese firms
and this situation hinders the development of an efficient
market for corporate control. Perhaps most importantly,
Japan's corporate sector fails to provide the returns
necessary to support and protect Japan's social safety net
and the long-term sustainability of its pension system.

3. White Paper co-author, Michael Connors, Tokyo-based
Senior Director of UK pension fund, Hermes Fund Managers
(Limited), described the common perception of Japan as a
system of stakeholder capitalism rather than shareholder
capitalism as "outdated and fundamentally inaccurate." In
most cases, "stakeholder capitalism" serves merely as "a
cover for management protectionism." ACGA members, as well
as the dozens of global investment funds and institutional
investors who helped prepare the White Paper, believe
"shareholder capitalism is fully consistent with protection
of the interests of all stakeholders", Connor insisted.
Furthermore, efficient use of capital and fair treatment of
shareholders is part of the "contractual obligation"
corporations accept when they list their shares on a public
exchange. Excessive accumulations of cash or low-yielding
liquid assets on corporate balance sheets may reflect the
operational success of many Japanese companies but "is an

TOKYO 00001353 002 OF 002


old-fashioned way of looking at what should be a dynamic
corporate entity", Connor continued.

4. Besides the more than three dozen reporters representing
both print and electronic media, the audience for the launch
consisted largely of Tokyo-based fund managers and
representatives of asset management companies and investment
banks, who were largely sympathetic to ACGA's views. Many
questioners focused on how the ACGA plans to follow up on the
report's publication. ACGA's Allen explained that earlier in
the day the authors had presented copies of the paper to
Tokyo Stock Exchange (TSE) officials and select Diet members.
The White Paper's authors also plan additional outreach to
GOJ financial regulators and senior officials. Allen urged
audience members to circulate the White Paper widely and
encourage their GOJ contacts to support TSE's efforts to
promote better corporate governance. "Nowhere in Asia,"
Allen noted, "do stock exchanges have the freedom to set
corporate governance policy without the backing of
governments."

5. Overall press coverage of the launch was neutral to
moderately positive. All major Japanese-language papers
carried factual reporting on the ACGA presentation. The May
15 evening edition of TV Tokyo's World Business Satellite
program (sponsored by the business daily Nihon Kezai
Shinbum), included extensive coverage. One program
commentator noted that if foreign institutional investors
took the time and effort to prepare this White Paper, it was
a positive sign they had "not yet given up" on the Japanese
market.
DONOVAN

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