Toshiba, NEC, Panasonic & Sharp lost a combined ¥1.9tn over the last 25 years

aggregate-ni

I am putting together a piece on corporate governance in Japan and stumbled over some interesting charts. The one above shows the aggregate net income of Intel and 20 of Japan’s tech juggernauts over 25 years. Sadly, Intel on its own made 41% more net income (currency adjusted) than all of the Japanese 20 combined. Toshiba, NEC, Panasonic & Sharp lost a combined ¥1.9tn ($18bn) over the last 25 years.

I’ve been speaking to the Financial Services Agency (FSA) about how to improve corporate governance as they look to tweak the code.

Is it any surprise that companies tend to perform better when board members (insiders) have a higher proportion of their remuneration linked to stock performance? Shareholders have traditionally been well down the list of priorities of Japanese companies, much to the chagrin of foreign investors. Stock incentives, especially in larger corporations, are often a minuscule part of total compensation for leaders. So much so that there is little incentive to focus on chasing real returns through more aggressive strategy. Many leaders in Japan would prefer to see out their tenure as CEO without blemish or scandal to avoid the risk of failure and the shame it would inevitably bring.

In hindsight looking at Sharp’s (6753) desperate long term need for crisis management could we have honestly expected any substantial restructuring when the CEO had $33,000 in stock despite being at the company 36 years? Had Sharp’s board held more skin in the game they might have defended shareholders much better against Terry Gou’s constant renegotiations. Perhaps if Sharp had learnt from Carlos Ghosn style performance based compensation structures, they might have been able to defend their turf from Gou. As it stands now Sharp were mere whipping boys of Hon Hai.

When I looked at insider (executive) ownership of Japanese corporations over 10yrs mapped against total returns, surprise surprise, there was strong correlation.

insider-10yr

More to follow but there is actually a lot of longer term hope here. Japan licks the world in most areas of technology. If they managed to connect those dots to shareholder returns then this market would re-rate substantially. Looks as though a growing number of corporations are working more performance linked pay.

stock-performqance-pay

I think that the authorities should encourage corporates to adopt English language financial materials. By doing so would invite more eyes from investors in markets where shareholder returns are prioritised. This would create an environment that would encourage Japanese corporates to unlock more value.

The JPX would accrue large upside. Not only would it gain more status as a proper global exchange, it would invite higher activity which would improve liquidity which is a virtuous circle for a financial exchange.  This is the number of Japanese corporates where CEO/Chairman engagement with foreign shareholders -a little over  10% of listed entities.

ceochair

So some interesting trends and maybe something to look forward to if Japan accelerates the pace of corporate governance application. They can start by hiring fewer lawyers, accountants and academics as independent directors too!

indepdirectorbyprofession

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