The dawning of Japanese Corporate Governance

June 20, 2018 Ben Yeoh

Source: Board Independence graph is Yanagi's book quoting ISS survey 2012-13

I recently finished a positive stewardship engagement with a Japanese company on the nature of independent directors. ESG ignored 10 years ago, is increasingly in focus in Japan. In my view, this trend is set to continue.

One resource to examine in this area is Ryohei Yanagi’s new book on corporate goverance in Japan (Amazon link here). Yanagi has a book event in London 4 July 2018 (link to event here).

Yanagi examines the Ito review (cf UK Kay review, a blog on Kay here), the corporate governance and stewardship codes in context of Abe’s reforms, and gives the historic background of why Japanese corporates are managed and governed like they are today.

Source: the RoE (Return on Equity) chart is based on RoE average primary index of each country (cap weighted), on 4Q (2004-2013( by Bloomberg data, from Moving the Mountain study group, 2014 from Yanagi (2018)

He discusses RoE (Return on Equity) and RoE - cost of capital spreads.

Since the work of Stern Stewart and others on EVA (Economic Value Add) from the 1990s and before (see a background paper here) which focus on Return on Invested Capital (or for some in modern day expressions Cash Flow Return on Investment) over some assumption of cost of capital, this thinking has been a dominant feature in US and EU corporate thinking and finance. Less so, seemingly in JP corporates.

Yanagi then synthesises this with ESG and intangibles and coins a concept of RoESG.

Yanagi suggests many Japanese corporates view some of their intangible ESG/CSR management as good (although again one can debate on reporting on it). (I also think many non-Japanese investors may not concur with what Japanese manager tout on CSR)

He then suggests that intangible/ESG management and management of RoE are two lens which are not opposed – in fact almost could be joined more symbiotically.

Not an entry level book, it draws practical thinking about how to look at financial and non-financial metrics for corporates and investors alike and roots it in the historic and cultural context of Japan.