Fumio Kishida Charts “New Capitalism” for Japanese Businesses
Last Thursday, when a colleague and I interviewed the Japanese Prime Minister and asked him to identify some of the defining forces of the world’s third largest economy, he could have simply waved his watch.
The Seiko Astron is expensive, sophisticated and exquisite for those whose wrists demand watchmaking bling. But it is also, in the form worn by Fumio Kishida, the modern descendant of the world’s first commercial quartz wristwatch. Seiko’s 1969 benchmark for miniaturization and manufacturing was started by a Japanese company just as the economy was beginning to become synonymous with industrial genius.
Yet instead of taking advantage of this prop or choosing from a long list of other possible gems, Kishida meandered without commitment around private sector vitality and innovative scientific development. It was the response of someone with a general election up for grabs at the end of the month.
By then, it is likely that we will hear more about an impartial “new capitalism”, promises of “warm” reforms and a general rejection of neoliberalism which will be vague on the precise details. Stuff, in other words, calculated to play well with a pessimistic electorate.
None of these reassuring generalities should, however, distract attention from certain potentially very important specificities that may loom in the background, in particular on the question of the reform of corporate governance and whether it should henceforth be applied to a system with two lanes for large and small businesses. . In a 2020 book, Kishida argued so, and he echoed that sentiment to the Financial Times last week.
“It is unrealistic to apply the same rules. Corporate governance is important for small and medium enterprises, but they cannot do it the same way as large enterprises, ”he said.
Critically, he raised the interweaving of many small and medium enterprises with local associations and other businesses. Such companies, he hinted, needed more freedom to govern themselves in a way that might not have the strict economic sense demanded by governance-oriented investors. This is the positioning of a man who wants to make a name for himself as a friend of the huge small business sector in Japan affected by the pandemic.
However, any initiative to adjust a flagship reform of Abenomics such as corporate governance would be important. Kishida’s first two weeks in power, after winning the ruling Liberal Democrat leadership election and succeeding Yoshihide Suga last month, have been largely a projection of stability.
He is affable, a decent communicator, and was a strong foreign minister for five years when Abe was at the helm. In many ways, he appears to be the political equivalent of the “salaried CEO” who populates large swathes of Japanese companies. These leaders have climbed the hierarchical levels of the company avoiding risks. They lead with a reluctance to do anything too transformational, even when the situation calls for them to talk about a good change game.
But in 2015, when Japan introduced its first corporate governance code, the world of the salaried CEO was thrown into turmoil. The introduction of the code (and its subsequent revision) has allowed shareholders to assert themselves more effectively. While there have been foot trails and checkboxes, businesses have come under increasing pressure to be more transparent. They were asked to translate more documents into English, have more diverse boards with more independent directors, and put more emphasis on shareholder-friendly metrics such as return on equity.
Share buybacks have skyrocketed. Investors have won decisive victories over leaders. Companies that for decades had justified their relative lack of friendship with shareholders by citing a general concern for stakeholders (such as customers, communities, and employees) felt less able to do so. Kishida’s “new capitalism” rhetoric might set back some of that.
The largest listed companies have, for the most part, been the driving force behind improvements in governance in Japan and have been rewarded. Their midsize and smaller counterparts have often backed down from the burden of compliance and, in many cases, remain steadfast governance black spots. Kishida’s instinct seems to be that this second group should be treated more leniently, leaving a substantial portion of Japanese publicly traded companies less vulnerable to the cruelties of “old capitalism” and freer to prosper in its version.
Caution would be wise. The corporate governance code can still have its limits and injustices. But an attempt to free parts of the market from its restrictions, however well-intentioned, could end up undoing one of the few parts of Abenomics’ “third arrow” of structural reform that has really worked.