It's Official; the Vice President of the Osaka Stock Exchange Was a Crook


Prosecutors searched the home of a former vice president of the OSE who has admitted ordering fake transactions to pump up the volume of the OSE, so the TSE "won't get away with it". He had set up Roitofax an investment company shell, to simultaneously place buy and sell orders with three companies, including Japan Electronic Securities. The orders were actually placed by employees of the OSE using Roitofax as a cover. Some JPY2.6 billion in fake trades was done this way before March 2000. The orders were for equity options, and the Securities Exchange Law forbids placing buy orders for the instruments and simultaneously placing matching sell orders in its market manipulation clause.


(TT's Take) The kicker to this sorry tale is that Takuo Noguchi, the former OSE official who was bagged, was also once a high-ranking MOF bureaucrat who headed the Fukuoka Regional Tax Bureau, and was also dean of the National Tax College, which trains the nation's tax officers. He was vice president of the OSE until 2000, which makes one wonder how much of his knowledge of Japan's tax system was put to work at his job at the OSE. It has long been known that bribe and graft are a time-honored tradition in Japan's political circles, and the bureaucracies have had their share of scandals as well, including the Bank of Japan. Moreover, such shenanigans can occur with regularity. Is there no business ethics in Japan? How can Japan claim to have fair and transparent securities markets, or anything for that matter, when such agencies, peppered with bureaucrat "old boys", are either playing funding games with the LDP, or are hard at work feathering their own pockets?

Financial System Council Readies Framework For Preventive Capital Injections for the Banks


The Financial System Council, an advisory board to the prime minister, plans to release its report as early as this month. The new framework includes;


1. Numerical targets such as profit figures for banks receiving funds.


2. Government would hold a certain amount of voting rights, as opposed to holding preferred shares without voting rights, as they did on previous infusions of capital.


3. It would not require an increase in lending to small and midsize firms.


After release of the report, the Financial Services Agency will then begin work on necessary legislative changes. At the latest, pertinent bills would be submitted to next year's ordinary Diet session. Changes in the Deposit Insurance Law, which forms the basis for current public fund infusions aimed at responding to financial crises, and other legislation will also be discussed. After necessary budgetary measures are undertaken, such as preparing a separate preventive public fund infusion framework in addition to the existing 15 trillion yen account for responding to crises, the new preventive injection structure could be launched as early as next spring. The objective of the framework would of course be to strenghten and stabilize the financial system, before a crisis hits.


(TT's Take) The capital infusion procedures need to be made simpler than they are currently, in that the Prime Minister must first declare a "crisis" at the financial crisis council. Under the new framework, even banks that meet or exceed the capital ratio requirements of 8% necessary for international operations and 4% for domestic operations would be able to receive public fund infusions if their operations can improve greatly due to business model reforms or if they are needed to prevent a regional economy from declining precipitously. However, banks would not be required to accept public fund injections. Instead, the new system would be like the current one that has banks file for capital injections. The government will inspect the plans that banks present. But because management will be held accountable after the injections of public funds, bank executives involved in compiling the numerical targets may remain in their positions even after the public fund infusions are carried out. In the event that the targets are not achieved, however, a bank's senior executives may be asked to step down or return retirement bonuses. In other words, there is still not enough of an incentive in the new framework for banks to accelerate the clean-up of their balance sheets. For example, why is it so difficult to simply make NPL write-offs tax deductible while dismantling the current system of deferred tax assets (DTA's)?

Outside Directors in the US are Inneffective, Studies Claim


According to a recent New York times article, researchers have found little evidence that companies improve their performance by raising the number of independent directors on their boards. In fact, some studies have found that they perform worse. The Sarbanes-Oxley Act in the US was the latest in a round of efforst (private and governmental) to impose stricter corporate governance on companies following the accounting scandals in the US. Proponents of stricter corporate governance have long pushed for more outside directors, on boards and on audit committees. But a study by Sanjai Bhagat, finance professor at the University of Colorado, and Bernard Black, professor at Stanford, found that in examining 1,000 US companies from the end of 1990 to 1993 that the companies who performed the worst were those whose boards had the greatest proportion of outside directors!


One of the most crucial factors, as pointed out by Paul Gompers, a professor at Harvard University, is its corporate culture--i.e., how the firm is by its corporate culture responsive to its shareholder concerns. His point is that, "until and unless boards become more active, board independence will continue to be a poor proxy for good corporate culture."


These studies are ironic, in that there has been increasing pressure for Japanese companies to adopt US-style corporate governance, with the number of outside directors on boards and in the audit committee as one key yardstick for progress in corporate governance in Japan. A total of 36 listed companies will adopt U.S.-style corporate governance by the end of June, following amendments to the Commercial Code that took effect in April, according to the Nihon Keizai. Companies that adopt the system will set up three committees -- one to conduct audits, one to nominate board members, and one to set executive pay. Many of the companies adopting the new format have done so apparently to improve their corporate image in the eyes of overseas investors. Many Japanese firms are also embracing US-style corporate governance because they have come under the wing of foreign companies.


(TT's Take) However, some of Japan's most admired companies, such as Toyota and Canon, have given it quite a lot of thought, and have realized that introducing US-style corporate governance without integrating the principals behind such actions (such as active boards) or without changing the corporate culture as regards corporate governance and attention to shareholder interests is like importing a left-hand drive 1960s Cadillac to drive on Tokyo's narrow roads--i.e., only useful for appearance sake.


The other "buzz word" these days is Corporate Social Responsibility and Socially Responsible Investment. Numerous organizations have popped up overseas and in Japan to measure and rate companies in terms of CSR, and to create "sustainability" indices. Yet Deloitte Consulting, one of those management consultants responsible for a lot of important-sounding corporate buzzwords, has now come up with a piece of software called "Bullfighter" that identifies such jargon in documents and helps decipher what the companies are actually saying, and to help companies weed out the buzzword "BS" from their documents.


Yet there is Nikkei Business in their June 16 issue helping to propagate more "BS" by explaining what CSR is and implying that it is a new way for corporations to define "value". Such publications do a disservice to Japanese companies because they merely pick up on a trend or buzzword, listen to the pitch by proponents of such a trend or buzzword, and publish this as "gospel" to their Japanese corporate readers. Of course, any Japanese manager worth his salt would take such articles with, you guessed it, a large grain of salt. Moreover, he would intrinsically understand that corporate responsiblity is good business, but only if it comes on top of sustainable sales and profitability–profitability sufficient to satisfy all stakeholders in the firm, including the employees. Indeed, companies whose business model is broken and who have lost their value-added in the market place have much bigger fish to fry than CSR--how about surviving.




Among the firms that are embracing the U.S. style, five companies, including Hoya Corp. (7741), Seiyu and Resona Holdings Inc. (8308), have more outside directors than insiders, and five other firms have the same number of inside and outside directors. At 26 companies, insiders outnumber outsiders. In the U.S., many companies have boards with a majority of outside members.

Japan Telecom boasts the highest number of outside directors at nine, followed by Sony at eight and Seiyu at seven.