CORPORATE GOVERNANCE REPORT REBUKES JAPAN'S

UNCLAS SECTION 01 OF 02 TOKYO 001353 SIPDIS DEPT FOR EAP - AMBASSADOR HASLACH ALSO FOR EEB/IFD: DIBBLE AND KAMBARA NSC FOR TONG DEPT PASS USTR FOR CUTLER AND BEEMAN USDOC FOR 4410/ITA/MAC/OJ JUSTICE FOR ANTITRUST DIVISION - CHEMTOB TREASURY DEPT FOR IA/CARNES AND POGGI GENEVA FOR USTR E.O. 12958: N/A TAGS: EINV ECON OECD JA SUBJECT: CORPORATE GOVERNANCE REPORT REBUKES JAPAN'S STAKEHOLDER CAPITALISM REF: TOKYO 408 ¶1. The Asian Corporate Governance Association (ACGA) released its first "White Paper on Corporate Governance in Japan" May 15 in Tokyo. The paper, endorsed by seven leading global pension funds, highlights six areas in which institutional investors believe Japanese corporate governance must be improved. The paper also provides detailed recommendations in each area. The ACGA's six policy priorities are: - Reaffirmation of the principle of "shareholders as owners" of listed companies; - More efficient use of capital by Japanese firms; - The need to strengthen systems for independent supervision of corporate management; - Legally binding "pre-emption rights" to prevent dilution of shareholdings through uncontrolled allocation of newly issued shares to third parties; - Reconsideration of the trend toward adopting corporate takeover defenses, but if such defenses are necessary, adoption of Canadian-style "shareholder rights plans" rather than "poison pills"; - Greater transparency in shareholder meetings and proxy voting. Embassy has forwarded a copy of the White Paper to EAP/J. ¶2. The paper was presented at a two-hour, standing-room only press conference. The White Paper's author, ACGA Secretary General Jamie Allen, explained its main theme is "sound corporate governance is essential for creating a globally competitive corporate sector in Japan, as well as for the long term growth of Japan's economy and capital markets." Allen noted "corporate governance in most Japanese listed firms does not meet the needs of the company's stakeholders or the country at large." There is inadequate supervision of corporate strategies in the vast majority of Japanese firms and this situation hinders the development of an efficient market for corporate control. Perhaps most importantly, Japan's corporate sector fails to provide the returns necessary to support and protect Japan's social safety net and the long-term sustainability of its pension system. ¶3. White Paper co-author, Michael Connors, Tokyo-based Senior Director of UK pension fund, Hermes Fund Managers (Limited),described the common perception of Japan as a system of stakeholder capitalism rather than shareholder capitalism as "outdated and fundamentally inaccurate." In most cases, "stakeholder capitalism" serves merely as "a cover for management protectionism." ACGA members, as well as the dozens of global investment funds and institutional investors who helped prepare the White Paper, believe "shareholder capitalism is fully consistent with protection of the interests of all stakeholders", Connor insisted. Furthermore, efficient use of capital and fair treatment of shareholders is part of the "contractual obligation" corporations accept when they list their shares on a public exchange. Excessive accumulations of cash or low-yielding liquid assets on corporate balance sheets may reflect the operational success of many Japanese companies but "is an TOKYO 00001353 002 OF 002 old-fashioned way of looking at what should be a dynamic corporate entity", Connor continued. ¶4. Besides the more than three dozen reporters representing both print and electronic media, the audience for the launch consisted largely of Tokyo-based fund managers and representatives of asset management companies and investment banks, who were largely sympathetic to ACGA's views. Many questioners focused on how the ACGA plans to follow up on the report's publication. ACGA's Allen explained that earlier in the day the authors had presented copies of the paper to Tokyo Stock Exchange (TSE) officials and select Diet members. The White Paper's authors also plan additional outreach to GOJ financial regulators and senior officials. Allen urged audience members to circulate the White Paper widely and encourage their GOJ contacts to support TSE's efforts to promote better corporate governance. "Nowhere in Asia," Allen noted, "do stock exchanges have the freedom to set corporate governance policy without the backing of governments." ¶5. Overall press coverage of the launch was neutral to moderately positive. All major Japanese-language papers carried factual reporting on the ACGA presentation. The May 15 evening edition of TV Tokyo's World Business Satellite program (sponsored by the business daily Nihon Kezai Shinbum),included extensive coverage. One program commentator noted that if foreign institutional investors took the time and effort to prepare this White Paper, it was a positive sign they had "not yet given up" on the Japanese market. DONOVAN