Japan Association of Corporate Directors

The global economy is shifting from an era in which it was pulled along by one country to a delicate balance where the instability of advanced economies such as the U.S. and Europe are offset by the strong growth in developing economies such as Asia and Central and South America.

The Japanese economy saw corporate performance bottom out and adopted a forward-looking stance toward capital expenditure, M&A and various investments. However, just as the second half of 2011 was starting to look bright, Japan was faced with the first large-scale hardship since the end of the Second World War with the March 11 earthquake.

Many people lost their lives in the tsunami, and infrastructure and economic damage was immense. Along with hoping to get those who were met with disaster back on their feet as soon as possible, those of us who are engaged in managing businesses feel the strong need to fight to restore Japan's economy by boosting it to a level that surpasses that of before.

The Japanese economy now faces three hardships from the earthquake; the damage from the earthquake itself, the issue of nuclear power and electricity, and rumors or mistrust. The nuclear accident in particular poses the major obstacle of environmental impact, reputation issues and electricity shortages for the recovery effort.

Furthermore, in addition to all domestic industries being damaged by the earthquake, the supply chain of manufacturers such as the auto industry suffered a major blow severely impacting trends in the global economy. Japan has received a large amount of reconstruction assistance from many countries, and is receiving a lot of attention as to how the Japanese economy will recover going forward.

While the disaster highlighted the strength Japan's industrial technology and the orderliness and level-headedness of the Japanese people, the weakness of the government and crisis response systems in corporations, which are the representative of Japan, were revealed, calling Japan's long established progressiveness into question, a loss that cannot be undone.

Despite this environment, the Japan Associate of Corporate Directors reigned in its 10th year, thanks to all of its members. When it was established in 2001, there was much anticipation that the reformist track of the Koizumi cabinet would change the Japanese economic system and a glimmer of economic expansion was seen being pushed by stock price recovery and stability in the real estate market. Along the same thread, there was also heightened interest in corporate governance. However, with the subsequent market economy slump and the effects of the Lehman Shock from the excesses in the U.S. economy, Japan has turned its back to the U.S and European style of management represented by corporate governance, and its spread in Japan continues at a halted pace.

Since then, Japan's economy has stagnated from another deflationary spiral, with its recovery severely lagging behind that of the U.S. and European countries. Not only growth, but also views of corporate revenues and dividends in addition to various rules are moving toward global standards, and a forward-looking stance toward responding to this is yet to be seen.

Not only growth, but also the fact that a swift recovery has not produced a forward-looking stance is also apparent in an overriding environment of globalized attitudes toward corporate revenues, dividends and rules.

Standardized accounting methods and corporate governance are being adopted by not only by the U.S. and Europe, but also by various countries in Asia, moving toward a global standard. Foreign investors in particular view this as a minimum requirement, and a system of outside oversight is necessary for growth and recovery in the eyes of stakeholders.

Even in Japan, where industry has halted due to the earthquake, it is anticipated that global attention towards Japanese governance will become even stricter in the future.
Recognizing this, the Japan Association of Corporate Directors held many meetings in which it debated corporate governance and management from all angles. Our membership numbers are less volatile than the economic environment, and with the support of the large number of members who have supported us for these 10 years; I strongly believe that we can raise the hope of further expansion of the Japanese economy.

The spirit of our association remains unchanged, and although this association is a place for study by capable members, we promote true corporate governance in corporate activities in Japan and still feel that contribution to further vitalize corporate activities and the creation of a business course of action is still yet to be done.

The disaster highlighted the weaknesses overlooked daily.

The country's lack of governance for its decision-making system was apparent in a number of instances. In addition, the issue of corporate governance should be called into question as corporations- the representatives of Japan- were unable to properly respond to civil society and the markets, further deepening the crisis.

The government will also be called into question for its speed in responding to the disaster, its decision-making methods and especially its role as a governing body in its performance toward future restoration.

Governance at corporations that include risk management, response in the event of risk, leadership, a road map to recovered performance and consideration for important stakeholders such as regions, clients and shareholders will also be called into question.
In addition to preventing scandals and responding when an event occurs, the purpose of governance is also to create a bright future by directing the future vision and direction, improve the value of the organization and to create prosperity.

Even with low growth, some corporations received a certain measure of stability by maintaining a good relationship with the government and had frameworks in place that were steeped in resistance to reform. The disaster has created an environment where we need to wake up from this.

Even before the disaster, investors from Europe, the U.S. and around the globe have been passing over Japan and moving to emerging markets in Asia and Central and South America to avoid structural problems such as the dwindling birthrate, aging population and politics, in addition to the low corporate profitability and a stance that disregards shareholders. On top of that, Japan is faced with many issues including globalization of human resources and its relationship with Asia as represented by the Trans Pacific Partnership (TPP).

Given these factors, growth in the private economy needs to take the lead in the recovery from the disaster. It is of the utmost importance that, along with the role played by the government, corporations take appropriate risks, increase revenues and, by distributing this among employees, shareholders and the region, expand the Japanese economy and stimulate vitality.

Certainly, as an individual engaged in management, the current condition is not favorable. Especially in times like this it is vital that we encourage the organization and implement corporate governance that drives improved value. However, this is just a system, and the fundamentals are rooted in the strong determination and perseverance of the management. Also, the past is proof that using this system in the same form as it is in the U.S. and Europe will not have good results.

Times like this are a golden opportunity to consider how we can blend the benefits of the U.S. and European model with Japan's strengths and advantages, and what type of governance system should be implemented in the Japanese corporations that have so many distinguished managers.

There are signs of major innovations in the manufacturing, energy and service industries and the world focus is on Japan- a once-in-a-lifetime chance to build a new Japan.

This year, the Japan Association of Corporate Directors will participate in numerous activities to recover from the disaster and to improve the presence of the Japanese economy. Together we will make this a charged year where we work to increase the number of world-class corporations, not just for product services, but also for management.

Thank you.