Tokyo Stock Exchange chief defends Japan’s progress on corporate governance

The head of the Tokyo Stock Exchange has defended Japan’s progress on corporate governance following a high-profile scandal at Toshiba, rejecting accusations a market overhaul due next year was extensively watered down.

Hiromi Yamaji, who was appointed TSE chief executive in April, told the Financial Times that investors should not judge Japan by the boardroom meltdown at Toshiba, saying the situation was a “special case”.

His comments came as the TSE prepares for a reorganisation that will streamline the “first” and “second” sections of the main bourse, along with the Jasdaq and Mothers markets for smaller companies and start-ups.

“We aimed for a reform that would be good for everyone involved in the markets,” Yamaji said. “We’re not doing this for foreign investors, but we wanted to improve the convenience of the Topix index as an investment metric and reorganise the market segments based on more precise concepts.”

The new market segments are titled “Prime”, “Standard” and “Growth”.

Yamaji’s comments coincide with an apparent move by corporate Japan to reassert itself against reform and as foreign investors have grown increasingly sceptical of the country’s commitment to improving governance since Yoshihide Suga became prime minister in September.

In a speech in June to the American Chamber of Commerce in Japan, Satoshi Ikeda, chief sustainable finance officer at the Financial Services Agency, described such governance reform as “really hated by corporate executives”.

A primary focus of investors’ doubts has been what was supposed to be a sweeping reorganisation of the way Tokyo-listed stocks are categorised. Earlier versions of the plan suggested clear incentives for companies to abandon cross-shareholdings and strengthen board independence to qualify for prime status, which means they are considered to have higher governance standards and growth potential. Membership would depend on free-floating market capitalisation excluding cross-held shares.

The reality, said analysts, is that the reforms have been so watered down that they will force very little change in company behaviour.

Masatoshi Kikuchi, chief equity strategist at Mizuho, said that while some companies could try to meet the criteria for Prime market inclusion, the general impression was that the TSE rejig would not encourage the widespread governance reform many investors think is necessary.

“The criteria of the Prime market have been lowered from the initial plans due to the opposition of small or regional companies,” said Kikuchi.

Yamaji defended the reforms, saying the overhaul should be considered together with the country’s recent revision of its corporate governance code. “Certainly, Japanese corporate governance is progressing but obviously it’s not perfect yet,” he said. “More and more companies are quite prepared for dialogue with investors.”

Still, analysts have warned that governance progress over the past six years could be seriously undermined after an independent investigation found that Toshiba had colluded with the Japanese government to suppress activist investors ahead of last year’s annual shareholder meeting.

“I think Toshiba’s case is special,” Yamaji said. “I think it is factually inaccurate to say that this is evidence of the lack of progress in Japan’s corporate governance.”

Corporate scandals such as Wirecard occur globally, said Yamaji, but he stressed that the situation surrounding Toshiba was particularly unusual for the frequency of its governance lapses.

The industrial conglomerate’s troubles began in 2015 with the discovery of accounting fraud and Toshiba came close to collapse two years later with the failure of its US nuclear business. An emergency issuance of $5.4bn in equity in 2017 stuffed its shareholder register with foreign activists, sparking clashes with investors that have led to the recent ousting of its board chair.

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