METI OFFICIAL LABELS VM'S REMARKS "INAPPROPRIATE"

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 000402 SIPDIS SIPDIS DEPT FOR EAP ALSO FOR EEB/IFD/OIA:KAMBARA DEPT PASS USTR FOR CUTLER AND BEEMAN NSC FOR TONG USDOC FOR 4410/ITA/MAC/OJ/NMELCHER JUSTICE FOR ANTITRUST DIVISION - CHEMTOB TREASURY DEPT FOR IA/CARNES AND POGGI GENEVA FOR USTR E.O. 12958: DECL: 02/12/2012 TAGS: EINV ECON PREL JA SUBJECT: METI OFFICIAL LABELS VM'S REMARKS "INAPPROPRIATE" REF: TOKYO 317 Classified By: Ambassador J. Thomas Schieffer. Reason 1.4 (b)(d) ¶1. (C) Summary: Ministry of Economy, Trade and Industry (METI) Vice Minister Kitabata's controversial January 24 remarks dismissing the role of shareholders and independent directors in corporate governance (Ref) were "unacceptable" and "inappropriate", according to the METI official who drafted Kitabata's speech. The media reported only "the most controversial" parts of Kitabata's remarks where he digressed from his prepared text. The METI official emphasized there has been no change in the GOJ's policy of seeking increased foreign direct investment. End Summary. ¶2. (C) The METI Director of the Industrial Organizations Division, Hiroaki Niihara, in a one-on-one briefing for Econoff February 12, apologized for Vice Minister Kitabata's "improper" remarks before a group of business executives January 24. Niihara, who wrote the speech for Kitabata, explained the Vice Minister's most controversial and widely reported comments were a departure from the prepared text as Kitabata tried to make his points in "plain language." Niihara expressed his hope this incident would not lead to an extended dispute between the U.S. and Japan and insisted there has been no change to the GOJ's pro-investment policies. ¶3. (C) Kitabata's remarks came before a METI-sponsored research group (Keizai Sangyo Chosa-kai) consisting mostly of business executives. The session was to be a closed briefing on METI's recent recommendations to the Tokyo Stock Exchange (TSE) regarding listing of non-voting shares. According to Niihara, a participant secretly recorded the remarks and released them to the media. Without denying the accuracy of the press reports, Niihara acknowledged the remarks were inappropriate whether or not the session was supposed to be closed. He insisted, however, the press reported Kitabata's comments out of the context of the full speech and, for that reason, they came out harsher than intended. ¶4. (C) Niihara clarified four main points of the Vice Minister's speech. First, the full text noted shareholders have only limited liability for the activities of the firm and their shareholder rights are easily transferable by sale of the stock. Compared with the responsibility of management for the day-to-day activities of the company, shareholders' roles are limited. In Kitabata's "plain language", this came out as shareholders are "irresponsible" and always "demanding higher dividends." ¶5. (C) Second, the prepared text emphasized the need for Japanese companies to improve investor relations. Unlike U.S. directors who have, in Niihara's words, "over a hundred years of experience with investor relations," most Japanese managers have limited experience dealing with individual shareholders and need to work harder in this area. In Kitabata's version, this sentiment came out as companies should "pick and choose their shareholders." ¶6. (C) Third, Niihara denied Kitabata intended to say independent directors were "useless" on Japanese corporate boards. Both METI and Japanese company law envision a role for independent directors. However, Niihara continued, because Japanese boards focus more on day-to-day company operations than American boards, directors should have thorough knowledge of the company's line of business. As Japanese boards evolve in the direction of U.S. boards, which set the long term strategic direction and leave direct management of company operations to hired executives, there TOKYO 00000402 002 OF 002 should be an enhanced role for independent directors on Japanese boards. ¶7. (C) Finally, the purpose of Kitabata's speech had been to explain METI's proposal on non-voting shares. Japan, Niihara said, wants to learn from U.S. and UK experiences and make available a variety of listing options to Japanese firms, especially venture companies. The TSE will make the final decision on amending its rules and is considering a number of proposals while keeping investor interests paramount, Niihara insisted. ¶8. (C) Comment: There is no doubt Niihara was looking to clean up after the Vice Minister, but the point is certainly valid that Kitabata was not conveying official GOJ policy. Keidanren and others continue to note the goal of increasing foreign investment, albeit sometimes with particular twists (septel). METI understands USG and investor dismay and Niihara's extensive explanations demonstrate they want to put this issue behind them. Nevertheless, this incident highlights the need for advocacy on sound corporate governance in Japan with both GOJ and private sector audiences, including with respect to the use of independent directors on company boards. SCHIEFFER