TT-603 -- Increasing Professionalism of Company Boards, e-biz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, February 27, 2011, Issue No. 603


- What's New -- Increasing external directors at public companies
- News -- Cheap web English lessons with Philippines
- Candidate Roundup/Vacancies
- Upcoming Events
- Corrections/Feedback
- News Credits

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In the Nikkei last week was a short round-table article
between newspaper reporters speculating if activist funds
were a thing of the past in Japan. We were surprised to see
a comment in the article that Steel Partners, frequently in
the news over the last five years for its various jousts
with Sapporo Holdings (the beer company) and other firms,
is said to be looking to pull out of Japan. Apparently the
company is down to just four people, less than half the
original crew when the fund was working hard to extract
more value out of its target shareholdings.

Activist funds come in all shapes and sizes but the basic
idea is that instead of buying and holding shares, and
hoping that the target company management will do the right
thing and pay out good returns, the funds make sure that
their voice is heard and push the companies to look after
the shareholders, or else... Generally that "or else" would
mean votes against the re-election of the board of
directors and the loading of nomination slates with new
directors who are more shareholder friendly.

It's hard to say if activist funds are a good thing or not.
From the point of view of free markets and the right for
shareholders to expect strong returns, they certainly do
bring benefits to fellow shareholders, such as retirees,
who are hoping to make a living from returns on their
holdings. But at the same time, is it the fund or the
management who should have final say over just how much
cash is kept in the company war chest to see it over hard
times or to be ready for an M&A fight at some point, versus
simply shelling it out to shareholders as dividends?

In a free western stock market one can easily say that
shareholders come first, but we think it's safe to say that
in Japan pretty much every employer, employee, and
government official believes that the employees (and the
employee-directors) come first and that companies are
supposed to keep their staff economically safe and sound.
This is a social compact that companies have made with
government and the public at large, and shareholders
are perceived as just coming along for the ride. If they
get a good pay-out, that is luck, not a right.

Socialism? Not really, it's just a different take on
capitalism and the feeling that shareholders do little for
their returns since most public companies are supposed to
be out past the point of high risk.

[Continued below...]

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[...Article continues]

The problem of course is that if there is no shareholder
activism, and the status quo is allowed to continue over
succeeding generations of directors in major companies,
then the attitudes of those boards become entrenched and
inbred. Managers come to look at the public companies they
are entrusted to run as their own fiefdoms, to the
detriment of the true owners, the shareholders.

This results in massive retirement bonuses and other
benefits for employees, and parsimonious pay-outs to the
shareholders, to the point where one would wonder why
you'd even want to hold shares in such companies. It can
also result in defacto takeovers of the company without
any pay-out whatsoever coming back to the shareholders --
witness the Tokyo Style Vs. M&A Consulting Inc.court
case back in 2004 in which Tokyo Style's CEO admitted
making major investments of company money without
consulting the board. Dealing with self-serving directors is
no doubt a point that Steel Partners wanted to make in
its fight with Sapporo Holdings, too.

So is the short renaissance in shareholder activism in
Japan dead? In the form of Steel Holdings style funds,
quite possibly. However, as others are proving to their
success, there is another way: the more involved and
patient manning of public boards of directors with external
directors who are experts in various fields and whose
unquestioned expertise means that they bring more daily
value to board meetings than without them, and thus cause
those companies to want to work with their outside stake

These are typically known as engagement-focused funds, and
the Nikkei names some foreign investors using this more
collaborative style. They include Ichigo, Asuka Asset
Management Ltd., Taiyo Pacific Partners, and now a new joint
fund put together by Tokio Marine and UK-based Governance
for Owners LLP.

The key to collaborative participation on public company
boards is of course the quality and number of external
directors serving on those boards. Currently, most Japanese
firms either avoid bringing in external directors, or try
to bring in those who are "safe" and unlikely to rock the
boat. As a result, in 2007 public firms had an average of
just 1.5 external directors for every 10 internal
directors. This is significantly less than the more than
50% of external directors for companies in the USA, for

Now, in all fairness, it could be said that the availability
of skilled locally available external directors is limited.
However, being a director can be fraught with legal risk
and given that the boards one would be joining might
not necessarily operate professionally themselves, this
is an easy explanation of the lack of demand on both
sides. We got a taste of the issue of risk as a director
when sitting as adviser to LiveDoor's board in 2008 after
Horie-mon got arrested for allegedly window dressing
the firm's accounts.

But it could be that help is on the way. In November 2009,
Nick Benes a well-known M&A and corporate governance
consultant and Takaaki Wakasugi, Emeritus Professor at
Tokyo University and currently Professor of Economics at
Tokyo Keizai University, got together with three others to
form the Board Director Training Institute of Japan (BDTI).
The organization is a non-profit foundation dedicated to
the improvement of corporate governance in Japan and offers
training on corporate governance, effective board
practices, corporate and securities law, and related
topics. Probably not a moment too soon, given the widening
gap between Japan and the rest of the first world in terms
of best practice in corporate governance.

In fact, a recent survey by BDTI found the following

1. Just 50% of directors and executive officers at listed
companies are willing to claim that they know much about
corporate governance and the Company Law.

2. Only about 30-40% of listed companies offer any sort of
training at all on these subjects - and most training
programs are quite inadequate (e.g., a few lectures by a

3. Most sitting directors and Executive Officers admit they
need to learn more: 69% of them think that directors should
receive training and over 90% of directors and EOs at all
companies think that their subordinate managers (General
Managers and Section Chiefs) should receive such training.

Benes' LinkedIn resume shows that as of last year he also
has been sitting on the "Liason Committee on Corporate
Governance" for the Financial Services Agency (FSA), from
which advice flows to government for an upcoming revision
of the Company Law of Japan. It's great to see this
approach being taken on improving how Japanese boards are
managed. Instead of confronting them and forcing change as
some funds have been wont to do, the BDTI is taking the
much more pragmatic approach of co-opting participation
by holding up a quality standard for directors that will no
doubt become a certification. And Japanese firms LOVE

Right now the idea of trained and certified directors has
little recognition in Japanese corporations, however like
all needed standards, as more and more companies sign on
and agree to submit their directors for training then at
some point a tipping point will be reached. Think of how
well ISO standards have permeated Japanese businesses and
that they are now a "compulsory" mark of process quality. In
the USA, a similar organization called the National Association
of Corporate Directors (NACD), counts about 25% of all
Fortune 500 companies as members and has been highly
influential in setting best practice baselines.

If the BDTI program catches on in Japan, and we expect
that it will, it will also open up an interesting new
category of employment: that of professional external
directors. So common overseas, we may start to see suitably
qualified individuals serving on multiple boards as
external experts who can help those boards raise their
standards and their overall responsiveness to shareholder's
and the markets in general. Yes, it will take a while, but
once the largest firms embrace the idea, the smaller ones
will have little reason not to follow.

You can find out more about BDTI at

...The information janitors/



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+++ NEWS

- Online music sales in trouble?
- Cheap web English lessons catch on
- China investments in Japanese companies surges
- Japanese companies sitting on lots of cash
- Survey: Japanese kids highly pessimistic

-> Online music sales in trouble?

Uh, oh, maybe the shrinkage in the CD youth market for
music is more than just a move to online sales. Seems like
the market for online music is also shrinking. The RIAJ
published figures showing that online music sales via cell
phones fell 6% in 2010, to JPY74.74bn, and sales for all
online music fell 5% to JPY85.99bn. ***Ed: Is this a
demographic trend, or simply a reflection of the fact that
kids are short of cash, just as their parents are? Our
guess is that latter -- kids can't live without music, and
iTunes ensures that there is no shortage of supply.**
(Source: TT commentary from, Feb 26, 2011)

-> Cheap web English lessons catch on

A company called RareJob Inc. has a hit on its hands, with
JPY100 for 25 minutes of English conversation for company
workers and children with teachers down in the Philippines.
This is an amazingly low price and we have heard that the
company has as many as 50,000 people signed up for the
service. The lessons are conducted over Skype and sell in
packages of JPY5,000/month. ***Ed: While this seems like an
idea whose time has come, we also heard that some of the
excitement over the service lies in the fact that some of
the conversations are rather more adult oriented than they
are focused on English. Nonetheless, this kind of service
should see rapid expansion to other English speaking
countries of the world, with marketplaces setting the
actual fee rates to be charged. Our guess is that retirees
in the USA and elsewhere will wind up being the most
popular online English teaching providers.** (Source: TT
commentary from, Feb 24, 2011)

-> China investments in Japanese companies surges

While it may not be very popular locally, Chinese
investment in Japanese listed companies seems destined to
continue growing substantially. The Wall Street Journal has
said in an article that Chinese government investors have
more than doubled their holdings of Japanese listed firms
in the last year, to JPY1.6trn (US$19.4bn) -- still modest,
when you think about it. ***Ed: This news is of course
stressing Japanese commentators, who worry that at worst
the Chinese could threaten to dump Japanese stocks en
masse as foreign policy leverage, and at best, some
Japanese firms could fall under the influence of
Chinese investors. Our feeling is that strategically
sensitive firms may in fact wind up being subject to
legislation that will prevent a build up of foreign
holdings, much the same as holdings in TV companies is
limited to 20% today.** (Source: TT commentary from, Feb 25, 2011)

-> Japanese companies sitting on lots of cash

A very good commentary from Tokyo-based Darrel Whitten for, gives an overview of what Japanese
companies should and probably will do with their
ever-growing pile of cash. Apparently as of September 2010,
publicly listed companies were able to build up a cash
mountain worth around JPY64trn (US$780bn). Taking into
account all the major unlisted companies covered in the
Tankan business survey, then Japanese firms had more than
JPY202trn (US$2.4trn) of cash on hand. Since this was
created by slashing payrolls and capital spending,
investors wonder if M&A or share buybacks are most likely
to happen over the next 12 months. (Source: TT commentary
from, Feb 27, 2011)

-> Survey: Japanese kids highly pessimistic

A survey by Tokyo-based Japan Youth Research Institute has
found that Japanese high-school kids are highly pessimistic
about themselves. In a poll of 7,000 kids in Japan, the
USA, China, and South Korea, the Institute found that just
7.5% of local kids felt they were "a valuable person". In
contrast, 57% of those in the USA, 42% in China, and 20% in
South Korea felt they were valuable. In much the same vein,
71% of Japanese girls thought they are overweight, despite
the fact that they had an average BMI of 10% less than
other countries. For South Korean girls, the number was
57%, followed by 39% in China and 29% in the USA. (Source:
TT commentary from, Feb 25, 2011)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.


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In this section we run comments and corrections submitted
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