Elite investors for Japan Inc. learned a sad lesson with huge loss and set a path to swim in the mud water
Stakeholder capitalism is a popular subject in business school in America. Stakeholder represents a collection of shareholders, customers, employees, business partners, and the general public. America leads shareholder capitalism. Half the way around the world, Japan leads non-shareholder capitalism in awkward shape. With series of accounting scandals for last two decades, former prime minister, Shunzo Abe, launched Stewardship Code for corporate-governance reform in Japan eight years ago.
Accounting fraud in Japan Inc. still deeply rooted in magnifying mal-practice of business in Tokyo. Last year, Toshiba, a 145-year conglomerate, reported accounting misconduct for years with investment debacle on American nuclear energy project. On the list of foreign investors for electronic titan is an academic institution everyone knows.
Harvard University Fund took 3% stake of Toshiba, roughly 13m shares out of 433m shares outstanding in the capital market. According to my back-of-the-envelop calculation, the Fund incurred a loss of Yen130m ($1.2 m) in mal-practice of corporate governance.
The reform has not fully been in effect. The Japanese bureaucracy bogged down any attempt to reform the governance status among members of Japan Inc. The dilution is not welcome. The current status to maximize the tax revenue resides in the will of central government. Reform will never meet a fresh air for better changes.
On October 30, 2021, the Economist newspaper published a story of Japanese corporate governance. Half-way through the story, the correspondent wrote some welcome improvements. Changes include a decline in cross-shareholdings among old-fashioned institutions to 20%. Anti-hostile takeover measure has fallen to 8% last year. At least one outside director sits on the boardroom for 99% of the listed firms. Profit margins has gained to show mere 6% on accounting record, the highest level in history but still unacceptably low for American firms.
One possible solution to clean up the swamp has risen since 2016. Harvard Business School Club of Japan engaged in fighting against bad corporate executives with no Western education or whatsoever. The club is organized by a body of fresh talents with liberal education in Boston. They’ve got money, they have capabilities, but isolated young graduates go through robust fights against formidable contenders in the mud. The stake is very high.
The situation is becoming worse. With a rising cost of education at graduate school of business, fewer Japanese elites run a financial risk to apply for Harvard. The evidence is going to show the downward trend and the figure is not so promising. AGOS, a Japanese prep drill school for GMAT, unveiled a count of accepted candidate for MBA. Harvard accepted just four talents last year. The number is too few to join the force and empower the club.
The club set a path to ESG initiative, hosting a monthly event to advocate governance reform in Tokyo. HBS professors joined the multiple events by passionately suggesting a solution through empirical research. But the research, the Club’s objective, is not enough.
The Crimson swims in ever-lasting mud water. I hope their redemption pays off one day.