Ichiro Suzuki
In early February, heads of corporations based in the Kansai area (Osaka, Kyoto and the vicinity) gathered for a conference on a theme of management for multi-stakeholders and new capitalism. Some of the participants in the Kansai Economic Federation (Kankeiren) conference were not entirely comfortable with the rise of shareholder capitalism, not surprisingly.
“Who owns the company?” has long been discussed in Japan. Management often thought that the company was theirs in the first place with their employees as the second in line of importance. Employees are important in a land where they tend to spend their entire career with one employer. In recent years, a popular buzzword among management is ‘stakeholders’ that include customers, suppliers, community and anyone who surrounds the company. Being nice to people around you sounds nice and fits Japanese value, it seems. Unlike shareholders, stakeholders don’t shout at management for more profits, and they like this.
At the conference, President of Kansai Electric Power (KEPCO) stressed the importance of long-term perspective, citing the company’s experience of building gigantic Kurobe Dam and a hydroelectric power plant that required investments five times the size of KEPCO’s paid-in capital back then. Yes, it was a massive project that looked into surging electricity demand in the distant future. The dam, however, was built in the 1950s and time has changed since then. An investment of this scale might not have been made in the 21st century, due to the necessity of sharing the project’s risk-reward profile with shareholders. At that time, corporate shareholders owned a bulk of companies under the system of the mutual ownership within Corporate Japan. Shareholders’ interests didn’t have to be aligned with those of management at that time. Mutual ownership came under a fierce attack in the late 20th century especially from foreign shareholders. It created a financial havoc on Corporate Japan as value of the shares they had on their balance sheets went down sharply upon the asset bubble’s collapse, hence making a huge dent on their capital base. In addition, KEPCO operated in a regional monopoly environment with no competition from anywhere, either from domestic or foreign companies. For the management, the company’s future was a great deal easier to see than it is today. The industry remains heavily regulated today though there are some competition. It was odd that an executive from such a regulated business spoke at the conference.
In Japan talking about money is often considered as vulgar, and aggressively chasing profits might not seem like a well respected conduct, either. For management, single-minded pursuit of profits exert pressure on them and doing so requires skills that do not belong to everyone. They would be much happier talking about nice things even if financial results may or may not be satisfactory. Speaking against ‘naked capitalism’ that has been so pervasive in the U.S. and the rest of the Anglo-Saxon world tends to resonate well with average people on the street in Japan. Corporate America’ embracing of stakeholder capitalism makes them feel happy. Yes, Corporate America’s management has realized that fiercely aggressive pursuit of profits for shareholders has gone too far, and that trying to drive this farther does not bode well for the result that they wish to have.
Standing in the way of management who wish to sit back in business as usual are those foreign shareholders who always speaks loud about greater short-them returns. To some management these people are so detestable but they own more than 30% of the Tokyo market and well above 50% of not a few companies. So they have to listen to foreign shareholders, willingly or not. That means they have to work to attain higher valuation, embracing shareholder capitalism even if grudgingly.
Kankeiren’s near public refusal to embrace shareholder capitalism is stunning at a time when the Tokyo Stock Exchange is pressing the listed companies to raise their valuation as measured by price to book value ratio. When the TSE launched this campaign, well over half the companies were trading below their book value. The TSE even threatened the companies in the prime section of the exchange to raise PBR to at least 1.0 or face demotion to the standard section that is the second division. The Kankeiren chairman Masayoshi Matsumoto is also chairman of Sumitomo Electric Industries. His company traded 0.84 times book value on the day the Nikkei index crushed the all time high that stood since the end of 1989. Sumitomo’s PBR is well below average and the share is vastly underperforming the market over the last ten years. Mr. Matsumoto, however, doesn’t seem to be embarrassed with this and has no hesitation to show his hostility toward shareholder capitalism.
Even worse, companies in the standard section don’t face pressure to raise valuation, since they don’t get demoted to anywhere. Their management not surprisingly sits back and relaxes, thus leaving their company grossly undervalued. Large cap stocks’ domination has been a distinct trend in Japan as it has been on Wall Street. In the TSE, another reason is contributing to small and median cap stocks’ performance lag.
Who owns Japanese companies? It is shareholders. This is written in the commercial code. As management of Corporate America came to realize after fierce chase of shareholders value, interests of a variety of stakeholders have to be sincerely considered in order to achieve their financial objectives. While many Japanese management are making genuine efforts to deliver what shareholders want, some understand it only intellectually, wishing not to be bothered by loud-speaking shareholders.
About the author: Mr. Suzuki is a retired investment banker based in Tokyo, Japan.
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