Japan Revitalisation On Display
The IIRC Council Meeting preceded a joint Global Conference of the IIRC and the International Corporate Governance Network (ICGN), also held in Tokyo. The ICGN is a highly influential group representing some USD 26 Trillion in assets under management, with wide representation including institutional investors, pension funds, corporates, policy makers and academia. The focus of the meeting was to report on progress made within the “Japanese National Revitalisation” strategy that aims to get Japanese corporates to enhance their profitability and create sustainable value in the long term.
Many of the reforms relate to a series of changes to the Japanese Corporate Governance Code and Stewardship Code based on the ground-breaking Ito Report. Japanese corporate growth has slowed considerably since the late 1980s and the Ito Report, with the full backing of the Japanese government, seeks to ensure that Boards are tackling the systemic problems that corporates in that country display. With more than 400 participants from 30 countries keen to hear about the results of these changes, the conference was a chance for Japan to take stock under the gaze of the international community.
Japanese corporates have been hampered by habits or norms that impair growth, including:
- a tendency to hold very significant levels of cash and retained profits, without necessarily deploying those funds on innovation or new business activities;
- complex cross shareholding patterns designed to shorten supply chains and create vertical integration that have a tendency to flatten profitability across the connected group; and
- a hesitation to embrace international corporate governance norms in the area of independent directors.
As well as exhibiting low profitability, Japanese corporates have, in recent years, suffered a number of high profile accounting scandals, mostly frauds designed to disguise poor levels of profitability. The Ito reforms seek to address all of these issues, not least by requiring much greater levels of independent oversight within corporate boards.
Extremely significant progress is being made and the conference heard from high profile CEOs and Board members including Mr Osamu Nagayama the Chair of Sony Corporation, about the way that companies are addressing “uncomfortable truths” in a manner that takes strength from traditional Japanese values.
In addition to corporate governance reforms, Japanese firms are embracing Integrated Reporting to help ensure that management has a broader set of information and a clearer set of goals to help with long term corporate sustainability.
XBRL, in its small way, is assisting this process, with the standard long part of public company financial reporting at the Japanese FSA and Tokyo Stock Exchange, helping provide accessible and effective digital score cards. The conference also heard about the work of the Environment Agency that is using XBRL based (still voluntary) non-financial reports to help provide a picture to investors (especially pension funds) about the long term viability and long range planning of corporates over an up to 50 year time horizon.
The ICGN/IIRC event provided a very public showcase on the way that one of the world’s largest economies is facing the future, applying a number of tools to improve business performance. Better reporting is vital part of the toolkit.
