International Investor Relations

Back to Contents of Issue: April 2002


Japan has heard the call from outside to change a thousand times, but does the country just need more gaiatsu (foreign pressure), or does it think it can hang in a bit longer until the world comes 'back to center?'

by By Alex Stewart
In the corporate world what is under debate is the whole system of Japanese management, governance, and ultimately, thinking. The major agents of change are global financial institutions seeking a piece of the world's second largest economy. In the past, gaiatsu was from the outside-in, but the invading financial institutions are working from the inside-out, by buying major institutions, such as Yamaichi Securities and the Long-Term Credit Bank. They have inserted their cultural influence deep into the system, based on a Western, especially Anglo-Saxon, view of capital. Quite rightly the Japanese have described these representatives as 'black ships.'

Just as the Black Ships which arrived in Japan 150 years ago represented the march of Western commerce and colonization, the new 'black ships' represent the march of globaru-ka, or globalization. This is more powerful and insidious than kokusai-ka, the Japanese for internationalization, because it wants companies to adapt to global standards of governance, accounting, and even ethical behavior. A sign of the government's response to this is the reform of the 50-year-old Commercial Code, which, effective from April 2002, will make it possible to establish supervisory boards staffed by outside directors. It heralds the start in principle of Western-style management, in which CEOs exercise executive powers, supervised and assisted by outside directors.

Japan is starting from very different assumptions about corporate governance compared with Anglo-Saxon capitalism and it is questionable how easy the transition will be. Under the Japanese lifetime employment system, Japanese companies place the interests of employees above the interests of shareholders. There are also two types of shareholder: core and non-core. The core shareholders cross-hold each other's shares and exert no pressure for returns on their equity. Non-core shareholders have no ability to influence the management because core shareholders effectively have majority control.

The fact that the core stakeholders own a blocking share means there is no market for corporate control. The dislike of conflict also means there is a strong aversion to hostile takeovers. The relative coziness of this system is exploited by sokaiya racketeers. In response, around 90 percent of companies hold their shareholders meetings on the same day to limit disruptions. The lack of a market for corporate control also produces less strict criteria for valuing companies. In the past it encouraged brokerage houses to treat shares as a commodity, without regard to their underlying intrinsic value. The bubble economy was partly due to this divorce between price and value. In the aftermath of the bubble, small investors retreated from the stock market, and foreign investors have increased their relative presence. So, investors are gradually adopting global valuation standards.

The extent of these changes means companies need more help to adapt. This includes not least the services of Investor Relations (IR) professionals. The kind of IR support required should be distinguished from simple Financial PR, which makes a company's report and accounts look more professional. The pressures of globaru-ka demand a more strategic kind of IR, which helps companies understand the thinking and psychology of global investors.

The main focus of strategic IR will be on corporate disclosure, which underlines the open model on which global investors increasingly judge companies. In the West, the separation of executive and supervisory powers is long established, so a system of corporate disclosure only had to be reinforced. Whereas in Japan, the separation of powers has not existed, so the introduction of Western-style corporate governance is radical indeed. To adapt to the new emphasis on corporate disclosure companies need to learn at least four lessons.

The first thing is to understand that global investors are professionals, with very different backgrounds from their traditional Japanese counterparts. The latter have generally rotated through the investment department from other parts of the company, whereas foreign professionals have job-hopped to acquire new skills and maximize their earnings potential. Companies therefore need to adjust their investor relations activity to meet the expectations of professional investors, because the traditional style of domestic investor is about to become extinct.

The second lesson is that foreign investors judge companies from the point of view of their intrinsic value to the management of other companies, not simply to portfolio investors. This way of thinking is alien to domestic investors because there is no market for corporate control (the buying and selling of companies by other companies). Even so, the underlying Western way of thinking about value and management competence is steadily becoming more accepted.

The third point for companies to note is that there is a strong trend among foreign investors to compare companies within industries globally, and not simply within their own national stock market. This trend will be reinforced as stock exchanges like the Nasdaq become genuinely global.

The fourth point is that accounting standards are steadily becoming more uniform. One of the drivers is the push for International Accounting Standards. In Japan, a body was set up last year to help bring Japanese accounting practices into line with IAS accounting standards. This process will be accelerated by the adoption of software standards for data tagging, based on the so-called generic XML standard. In the future, all financial data may have a uniform tag, which will allow the same data wherever held, and in whatever language, to be directly compared. In this way companies' accounts will become more 'visible' to investors anywhere.

Finally, access to information is being revolutionized by the activities of Internet securities companies. Online trading enables retail investors to have almost the same access to information as investment institutions, paving the way for the ultimate democratization of capital. In lock step with this, global standards will continue to be proposed and adopted which support such an open trading environment, including standards for disclosure. Global capital will thus become even more 'global.' This is almost certainly an unstoppable trend, so companies should be preparing now to adapt their IR policies and their systems of good governance accordingly. ii

Alex Stewart is a founding member of Pacific Overture, a Tokyo-based consulting group, which is developing an international IR service, and principal of Kansai Capital Access, a venture advisory based in Osaka.

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