Chairman's Message 2013

Japan Association of Corporate Directors
Chairman Yoshihiko Miyauchi

Environment surrounding us

In the wake of the governmental change in December 2012, the economic policies of the Abe administration, as it is called "Abenomics" effect has brought a significant change in our business environment. The Bank of Japan's drastic monetary easing has led to the depreciation of the yen and the consequent recovery of share price and the real estate market, resulting in showing some brightness in business confidence. Also, Japan received favorable responses to its representation to joining the Trans-Pacific Partnership (TPP) talks and efforts toward growth strategies, making us feel a new life to slip out of the longstanding stagnation. In addition to expectation of both Japanese and overseas investors for improvement of corporate earnings, investment focusing on the mid- and long-term change in the Japanese economy has started growing. In terms of general consumption, family-style eateries and department stores have shown a recovery with the number of coming-in customers and unit prices. We would like to see closely on whether Japan will be able to break away from the deflation, which had been a major obstacle of the Japan's economy for long decades.

"Abenomics" consists of three planks: (1) aggressive monetary easing policies, (2) flexible fiscal stimulus, and (3) growth strategies. Of these planks, the first two "arrows" (monetary and fiscal stimulus) have already been launched. Although it is still uncertain to which way monetary easing is bound, fiscal stimulus is likely to provide a temporary yet quite positive effect. However, the effect cannot remain permanent in light of the financial burden. The substantial role of Abenomics should be played by the third arrow, "growth strategies." The future action that the government is expected to take is to carry out the environmental arrangements for the growth strategies. It is of paramount importance to stimulate activities of corporations that support growth and implement strategies to draw private sector dynamism. Releasing deep-rooted vested interests in Japan will help establish the platform of growth strategies and develop a market allowing private companies to fairly compete. Then, the wisdom of private sectors should be reflected to the public-led management system to enhance further efficiency. This could not be achieved without reengineering and drastic regulatory reform in the current economic system. Under such circumstances, each company is about to be tested its ingenuity and risk-taking capability.

Improving profitability and achieving growth of private companies will attract more investments including from overseas and increase share prices, employment and tax revenues. That is the way the overall Japanese economy achieve a longer-term development. Realizing such development is a part of our, or private sectors' responsibility. There are a number of tasks that companies must perform to assume such responsibility, we should focus on improving corporate governance by incorporating a solid supervisory function in the corporate management as one of the system which can be a powerful source of the development. It is an important major theme to stimulate management activities by effectively functioning the corporate governance system.

Challenge of Japanese companies

As a whole, Japanese companies are moving in favor supported by the recovery of share price and foreign currency effects partly as a result of change in the economic environment. However, are we fully responding to the change of the substantial industrial structure and the restructuring to be required? It is also important whether companies are being organized in a way enabling them to speedily achieve strategies required for the inside of companies. Some people point out and criticize that Japanese companies in general lack relentless pursuit of efficiency and dynamism for shifting their policies boldly. Especially, in terms of profit, which is the business ultimate goal, ROE of Japanese companies is as low as about 50% of western companies, and the gap has not been filled for long years. The prime focus of Japanese business seems to be placed on companies' continued existence rather than increase of profits recorded for each fiscal term. Key perspectives for investment criteria in the current world market, including growth potential, swiftness and profitability measured by ROE, etc., may be relatively disregarded here in Japan. Considering the original principle of capitalism, the point on how efficiently companies are able to spend an underlying risk money collected from shareholders must be a basic management indicator. Profitability indicators including ROE should not be ignorable for those who are involved in corporate management, but also the most essential valuation criteria for investors.

In order to enhance profitability, many Japanese companies secure internal reserves in anticipation of various risks under the persisting deflationary environment. It is also pointed out that such reserves are too excessive or are not sufficiently utilized to the subsequent operation. Although each company has a different circumstance, companies should be expected to allocate the excessive funds into new investment, such as M&A or stock repurchase from the investor's standpoint. In other words, companies are sought for pursuing growth by taking risks in a forward-looking manner and challenging something new under the new environment where an inflation target is set.

Activities of the Association

In order to establish a corporate governance system, the Japan Association of Corporate Directors has been striving to submit and study many related issues and presenting the results over the last eleven years. With regard to introduction of independent directors, the Association had early recognized the system as a core issue of corporate governance in Japan. While receiving suggestions from overseas institutional investors and witnessing a sign of movement toward legislation, we have been making great efforts to educate members about this system.

The systematical distinction, which is uniquely seen in Japan and has been the backbone of development of Japanese companies, such as the status of board of directors and directors, auditing systems and responses to institutional investors against a backdrop of cross-shareholding, draws the line from the world's advance movement.

Although it is easy to point out issues about such current state, only doing so cannot lead to constructive activities. The points on how such state can be changed and how we should act are becoming the key issues.

The Association has been striving to properly summarize and deepen understanding the original functions and roles of directors and boards of directors, which are the most important core of corporate governance. We believe that one of our missions is to enhance understanding of many people on why independent directors are increasingly sought, and to assist boards of directors in changing to a body which monitors performance and inspires executive officers.

To this end, we have three initiatives for the current fiscal year. Firstly, we will create an independent directors' database that contains members of the Association so as to solve the problem on personal shortage of independent directors. Secondly, we will provide directors with training to deepen knowledge and offer information about relationships between corporate governance and directors and a board of directors. We will also issue such things as certificates upon completion of the training session, if requested. We also intend to prepare guidelines or manuals for boards of directors and directors to improve the practical affairs. We will take a first step in hope that the achievement through such efforts will fully satisfy many Japanese and overseas investors and directors.

Corporate governance

Elementary understanding on corporate governance may include such things as scandal prevention, establishment of compliance and advice from a broader perspective. However, corporate governance is regarded as a vital constituent of the system to improve corporate performance from the investor's standpoint in western countries and therefore understanding of corporate governance goes beyond the level in Japan. In particular, Japanese companies will be further sought to continuously boost profitability more than ever in the future, facing on an urgent issue to build a framework meeting such requirement. The definitive picture of corporate governance is the system that spurs performance of executive officers in a manner that independent directors play a central position, a board of directors monitors business performance, good performance is recompensed by reward, and poor performance is corrected by the effective use of strong authority for decisions, including managerial change. If we address the heart of business under a system in which competent Japanese executive officers are newly developed, while transferring the traditional duties performed by a board of directors to another organization as much as possible, the future of Japanese companies will become more promising.

Now, monetary and financial arrangements have been introduced, aggressive risk taking and innovative move originated by business entities need to become a driving force to push the economy forward. As a result, we will finally be able to meet the needs of various stakeholders, including shareholders, employees and communities.

Independent directors, who perform a substantial function for corporate governance, nurture and encourage competent executive officers for companies in corporation with investors, will eventually contribute to brighter future of the Japanese economy through successful achievement to enhance corporate values of companies. Having recognized the challenge as our mission and responsibility, we will actively continue to perform our duties this year toward accomplishment of the challenge.