Considering one’s own values and
opening new management frontiers through dialogue

※Below is an excerpt from "Perspective II", "ABeam" Public Relations Report 2018-19.

Masahiro Inumaki

For a long time, corporate governance had been regarded as synonymous with compliance and scandal countermeasures. However, our understanding of what corporate governance is has changed as a result of government-led management reforms that seek to link corporate governance to the corporate growth. This change in understanding has effected a paradigm shift: it aims to restore corporate competitiveness and stimulate earning power, yet it also requires Japanese companies—which have suffered “the lost three decades”—to take concrete action. Company leaders now stand at a major crossroads. Here, Masahiro Inumaki considers what problems they face, and how these problems can be resolved.

Masahiro Inumaki
Executive Officer, Principal
Strategy Business Unit

Corporate governance contributes to the corporate growth

The Abe government came into power in 2012. One of the three arrows of its “Abenomics” economic policy is “strategic growth aimed at stimulating private investment” and, as part of this arrow, the government has called for the strengthening of corporate governance.

The idea of encouraging corporate growth was new and led to improvements in business environments with unprecedented speed; Japan’s Stewardship Code was established in 2014, and the Corporate Governance Code in 2015.

The alignment of the corporate codes of both investors and investees will lead to the full-scale implementation of Japan’s corporate governance reforms.

But how does corporate governance contribute to the corporate growth? Strengthening corporate governance results in the establishment of structures that enable both external and internal strengths to be maximized; this, in turn, leads to attempts to realize continued improvements in corporate value.

Examples of utilizing “external strengths” include engaging in dialogue with investors, and stimulating the activities of boards of directors, including external directors. However, the disclosure of diverse information—including non-numeric information—is required to ensure that dialogue with investors, including activist investors, leads both to a mutual understanding of each other’s differences and to the realization of a shared goal.

Management that can tolerate such information disclosure will be able to improve how their companies are perceived from an external perspective and, therefore, increase the value of their companies. External directors provide perspectives, knowledge, and experience that are alien to those inside the company, and it is of great importance that this is utilized in the proper manner.

To people interested in demonstrating internal strengths, I recommend you peruse the Ito Review, which was published in August 2014. This review adopts a concrete figure (index) of eight percent for return on equity (ROE).

In order to increase shareholder value, it is important for companies to understand the concept of “the Cost of Capital.” The review suggests that it is only when companies achieve an ROE that exceeds the Cost of Capital that economic value added is generated, and that corporate value is increased.

The majority of Japanese business leaders have, for a long time, lacked an understanding of the Cost of Capital. Since an ROE of eight percent can also be interpreted as the line where the price-to-book ratio (PBR) is equal to one, it is important that the Cost of Capital is understood from this perspective as well.

How, then, can companies increase their ROE? There is, for example, the Return on Invested Capital (ROIC) index. In ROIC, the denominator is “interest-bearing debt + shareholder equity” and the numerator is “net income for the year.”

The relevance of this index is that it measures intangible assets such as cultural, brand, intellectual, and human assets. The idea is to increase the value of intangible assets that do not form part of the denominator, thereby increase the value of the numerator. This approach is well suited to Japanese companies who strive to be important entities for their employees, and leads to the strengthening of earning power.

Essential governance for Japanese companies: the two perspectives of “offense” and “government”

At present, Japanese companies wishing to strengthen their corporate governance ought to consider two key ideas: the first is “offensive governance,” which is now frequently being debated in Japan; the second is controlling overseas businesses via “global governance.”

In order to implement offensive governance, corporate leaders must feel strongly bound to break free from long-lasting and problematic low-profit conditions, establish structures with the aim of improving corporate value in a sustainable manner, and engage in dialogue with various stakeholders.

With regard to global governance, as expansion into overseas markets and cross-border M&As continue apace, companies are prioritizing top-line growth; however, this has come at the expense of establishing rules and governance for delegating authority to overseas business sites. Global governance must first be considered from the perspective of corporate governance, and the appropriate structures established as required.

Both offensive and global governance will, I believe, eventually come to be discussed as a single idea; for now, however, thinking of them as distinct forms of governance is the easiest way to implement them effectively.

In pursuit of new management frontiers suited to Japanese companies

One of the defining characteristics of this series of governance reforms is that it entrusts concrete methodologies to the companies themselves in a principle-based approach.

While this might seem ambiguous and confusing, the concept of “comply or explain” is premised on the idea of entrusting the final evaluation to the markets; this means it functions effectively as a legal force.

To take an example, the aforementioned management index typified by ROE is but a single index. Other indices can, of course, also be used, and there is no harm in companies utilizing independent goals and indices.

Indeed, the recently revised Corporate Governance Code does not suggest that companies should only treat their shareholders with great importance, and when it discusses strengthening earning power, the code is not merely prioritizing a short-term viewpoint.

The key to corporate governance is carefully considering “what type of company are we?” And, when it comes to essential questions such as “what do we want to do?” and “what sort of company do we want to become?” companies ought to engage in dialogue with various stakeholders.

In other words, the more a company pays attention to investors and markets, the more it re-examines its essential value as a company.

Companies and their stakeholders must first overcome differences in viewpoints and values through sincere dialogue; they will then arrive at a form of management that is both well suited to Japanese companies and that facilitates the realization of sustainable improvements in corporate value.


(Excerpt from "Perspective II", "ABeam" Public Relations Report 2018-19)

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