Japan’s changing boardroom culture offers two-pronged opportunity

Baillie Gifford’s Donald Farquharson admits many investors are sceptical about the talk of improving corporate governance in Japan, but he believes the theme is very real and presents two sets of opportunities.

The Japanese authorities have introduced a number of measures aimed at improving corporate governance over the last year in a bid to make companies more shareholder friendly and to unlock the cash on their balance sheets.

The corporate governance and stewardship codes are also designed to improve transparency and help build sustainable growth.

While the idea has been broadly welcomed, some have questioned how effective the voluntary measures will be. However, Farquharson, who co-manages the Baillie Gifford Japanese fund, believes they will drive real positive change.

‘One of the things you often find is that company management tends to be quite polite. As a shareholder your interest in increasing shareholder value is given a tacit nod and nothing changes,’ he said.

‘Corporate governance is changing in Japan. It is a really powerful force and a lot of people address it with scepticism but this is the first time there is a governance code in place. It is shining a spotlight on corporate boards in a way in which hasn’t been done in the past.

‘You find investors are more critical and less tolerant of management than in the past. It will take time and different businesses will move at different paces, but I think it will happen and it will not go away – partly this time because it is encoded.’

He points to the codes’ call for companies to introduce more independent directors to their boards and a much greater focus on return on capital. The latter is particularly significant, Farquharson said, noting that many businesses have tended to hoard cash and are highly underleveraged.

‘There are questions on return on equity that were not being asked in the past. I think we are in the beginning of this process,’ he said.

Although those companies that comply with the measures are likely to be rewarded by improved performance and support from shareholders, companies that do not change and remain static will also present opportunities, in terms of being vulnerable to their competitors.

Farquharson believes this is particularly the case with companies that have internet-related products or offerings, where change is happening fast.

‘Japan tends to conform to high levels of service and it is still a very traditional society. Companies are less willing to adapt, and if your business is predominantly an offline business you don’t want to change what you do,’ he said.

‘That allows business disrupters to come in and have a far larger and longer period of expansion than you would find in any other country in the world. It is about how business models will be slightly different on the internet,’ he added.

The impact of the internet is one of the long-term trends Farquharson is backing and his holdings here include Rakuten, Fan Communications and SPI (see boxout right).

‘Everyone, everywhere is now thinking about how it [the internet] impacts people’s lives. In Japan, the way that it evolved is slightly differently than elsewhere in the world,’ he said.

‘The retail industry is quite fragmented, for example, and how the retail model has evolved in Japan is different.’


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