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Boardroom revolt brings Japan's state-backed fund to a halt

Departing directors lob harsh criticism at government

President Masaaki Tanaka and eight other board members at Japan's top public-private fund resigned as they clashed with the government over the state's role in private investment.

TOKYO -- Japan's largest public-private fund has suspended operations after a feud over executive compensation morphed into a more fundamental dispute over government's role in venture investment, leading to the resignation of nine board members.

Japan Investment Corp. President Masaaki Tanaka announced his resignation Monday, along with eight other nongovernment directors. The 2 trillion yen ($17.7 billion) fund, created less than three months ago, will suspend fresh investments.

"The problem was that the government as a whole did not have a clear goal and would change its policy in the middle," Tanaka told a press conference.

In Tanaka's telling, the dispute over executive compensation was a case in point. The Ministry of Economy, Trade and Industry promised in writing this September that it would pay him more than 100 million yen, only to take this back in response to public criticism.

The government's unilateral retraction of the pay promise "should not have happened in a country governed by law," Tanaka said.

The row is only symptomatic of greater distrust between the two sides and a fundamental disagreement on the government's role in the fund.

The JIC's predecessor, the Innovation Network Corp. of Japan, was often criticized for rescuing failing companies instead of investing in promising new fields. The JIC was meant to be more autonomous, allowing seasoned investment professionals make decisions rapidly on their own.

Yet in the months since its Sep. 25 launch, the JIC was "being revamped into a fund reflecting the intentions of the state," Tanaka said. METI had apparently demanded greater government involvement in the company at a Nov. 24 meeting.

Departing directors also leveled harsh criticism at the government's approach in statements released Monday. "There is no reason for me to remain an external director of the JIC when it is turning into a rescue operation for zombie companies," Stanford University finance professor Takeo Hoshi wrote.

Hoshi, who believes that governments cannot jump-start innovation, nevertheless took a chance on the JIC because of its leadership. But "I was wrong to think the Japanese government had changed," he wrote.

Reneging on a written commitment regarding compensation "dealt a critical blow to the JIC's credibility as a long-term investment fund," wrote fellow departing board member Ayako Yasuda, professor of finance at the University of California, Davis.

"It is common sense that the JIC needs to provide a level of compensation generally offered on the competitive global market," wrote attorney Akihiro Wani, another exiting director, rejecting criticism that the ministry had promised too much pay to the fund's top brass.

"If the ministry's actions were the result of a bottom-up decision-making process with no clarity over who has the final say, which is typical of Japan, then the JIC will have a difficult time succeeding in the U.S., where talent and quick decisions are key," wrote departing director Masahiro Sakane, former chairman of construction equipment builder Komatsu.

The central issue was how Tanaka planned to operate the fund. He wanted to set up smaller funds under its umbrella to oversee even smaller funds. But the ministry was wary of investing government money through these vehicles, since compensation at the smallest funds would not be disclosed.

Yet Tanaka was adamant about having such a structure, arguing on Monday that his intention was to make it easier to attract private investment from outside. "Of course I intended to disclose compensation at affiliated funds, since that would help us promote the organization better," he said.

The JIC had launched its first fund -- JIC-US, with a fund size of up to $2 billion -- this October. The JIC will liquidate all of its holdings in response to the management turmoil.

METI is setting up an office to handle communication with the fund, to be led by Deputy Vice Minister Toshihide Kasutani. If needed, Kasutani could be dispatched to take a post at the fund -- a highly unusual move for such a senior figure at the ministry.

"Given that the JIC invests the public's money, we expect a certain level of reporting and transparency," METI chief Hiroshige Seko told reporters.

But the government's role remains unresolved. "There's no reason for public-private funds to exist at all," said Seki Obata, a Keio University finance professor who was not on the JIC's board. Sovereign wealth funds in other countries exist to make money, and Tokyo's hopes of a more socially minded fund that brings fresh cash into developing fields were "logically flawed," he said.

That role can be filled only by the private sector, but "it won't be an easy path," Obata said.

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