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Japan's new corporate governance code unlocks opportunities

TOKYO -- Listed companies in Japan are scrambling to hire outside directors and unload cross-shareholdings in line with the introduction of the country's first corporate governance code earlier this month. This flurry of activity is creating a slew of business opportunities.

TV anchor Yuko Ezure is set to join Gourmet Kineya as an outside director in June.

     The 2,400-plus companies listed on the first and second sections of the Tokyo Stock Exchange fall under the code, which aims to eliminate notoriously opaque business practices and encourage transparent, decisive decision-making.

Unexpected offer

"Would you be our outside director?" Yuko Ezure, a television anchor, was recently asked by a former boss over an ox tongue dinner. The boss, who now works for Gourmet Kineya, an udon noodle restaurant chain operator listed on the exchange's first section, explained: "We've been looking for the right woman for quite some time." 

     The code requires a company to have two outside directors on its board. Meanwhile, Prime Minister Shinzo Abe has made it a national goal to have women in at least 30% of leadership positions by 2020. Hiring a female outside director kills two birds with one stone.

     Ezure has 11 years' experience as an anchor on business news programs and has interviewed more than 1,000 corporate presidents. Pending approval at Gourmet Kineya's annual general meeting in late June, she will become the Osaka-based company's first female director in its 48-year history.

     Qualified women are a hot commodity in Japan right now. Yuko Kawamoto, a Waseda University professor and former senior consultant at McKinsey & Co., has served as a director at multiple companies, including Mitsubishi UFJ Financial Group, Yamaha Motor and Resona Holdings.

     Fujitsu will hire Chiaki Mukai, a doctor and astronaut, and the first Japanese woman in space, as an outside director starting June. Housing material provider Lixil Group has invited British-American lawyer Barbara Judge, chairman of the U.K.'s Pension Protection Fund, as outside director pending shareholder approval.

     Of the companies listed on the TSE's first section, just 18% had two or more outside directors in 2013, and 21% in 2014.

Ending a "tradition"

Another major pillar of the code is cross-shareholding reform. Cross-shareholding is a quintessential Japanese practice in which two friendly companies hold each other's stocks. This helps them maintain a steady business relationship and fend off hostile shareholders. Under the new rules, companies must explain the rationale for holding nonperforming shares.

     As of March, the top 146 nonfinancial Japanese companies held 17.6 trillion yen ($140 billion) in noninvestment shares. "With more scrutiny from outside directors and investors, companies will be pressured to unload nonstrategic shareholdings or to sell off underperforming subsidiaries, creating more opportunities for local and overseas private equity investors to enter Japan," said Jim Verbeeten, a partner at consultancy Bain & Co. Japan.

     As the ratio of foreign ownership increases, Japanese companies are seeking ways to improve engagement with overseas shareholders.

     U.S.-based investor communications and technology company Broadridge Financial Solutions has been working with the TSE and the Japan Securities Dealers Association to develop an electronic proxy voting platform so overseas shareholders can receive annual general meeting proposals in English and cast their votes online.

     "Proxy processing had been very manual until the service was launched," said Patricia Rosch, head of Broadridge's Investor Communications Solutions international business. "Companies had to send out paper forms, and overseas investors had to return the forms early to be in time for the general meeting." With ProxyEdge, the company's electronic voting service, overseas shareholders can make submissions up until one day before a general meeting, as opposed to the old rule of 10 days.

     Broadridge introduced ProxyEdge to Japan in 2005, and now 554 share-issuing companies use the platform. These companies represent 82% of the market capitalization of the TSE's first section.

     The new corporate governance code has Broadridge preparing for more business. "Japanese companies are seeking to be more investor-friendly, recognizing the investor relations value of improving the proxy voting process for their institutional investors, both domestic and overseas," Rosch said.

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