In this episode of our series Rethinking Asia, we spoke with Ken Hokugo, head of Corporate Governance and the director of Hedge Fund Investments at Japan’s Pension Fund Association, which manages more than $120 billion in assets. Ken is also a globally recognized expert on and strong advocate for Japanese corporate governance reform. The opinions expressed by Ken in the podcast are solely his and not those of his organization, the Pension Fund Association.
Ken discussed some of the challenges that Japan faces implementing corporate governance reform. Notably, the practice of cross-shareholdings and the lack of truly independent directors sacrifice corporate success for management stability and dampen investor confidence in Japanese stocks. Ken discusses how cross-shareholding, among other practices, is entrenched due to a host of historic and structural factors. Some of our main takeaways from our exchange with Ken include:
- Poor market performance among Japanese stocks suggests a failure to create value and a lack of management accountability. Combined with a refusal to heed international investor concern, this has led to a lack of enthusiasm for Japanese stocks on the part of foreign investors in the past few decades.
- The use of cross-shareholding, which is common in Japan, is often cited as the poster-child for Japan’s need for corporate governance reform. Cross-shareholding refers to the practice whereby a web of companies hold significant quantities of each other’s shares, on the promise that each will vote to approve management initiatives.
- Holding cross-shares has origins among keiretsu, conglomerates that dominated Japan’s modern economic development. In post-World War II Japan, keiretsu used the practice to provide capital to companies involved in Japan’s re-industrialization. While the conglomerates were dissolved under government law, the practice of cross-shareholding remains, in many cases prizing management control over corporate success.
- The appointment of independent directors to corporate boards is relatively new in Japan. A small group of appointed “independent” directors monopolizes the position for thousands of companies and remains beholden to management in most cases.
- There are only a handful of reform success stories taking root in Japan. Beyond this, Ken believes collective engagement of domestic and foreign investors can help change corporate behavior.
The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.