VideoIn Japan, where courtesy still rules supreme over substance, a growing number of business leaders are starting to get downright rude. Frustrated by 10 straight years of declining shareholder values, these leaders are doing the previously unthinkable--writing off billions of dollars in worthless assets, selling off whole divisions, breaking off business relationships that date back to the postwar era, firing employees, and reorganizing the way they run their businesses.
And despite the growing mistrust of U.S. accounting practices in the wake of Enron, Japanese business leaders are looking to this country for inspiration, particularly in two respects that cut to the heart of Japan's economic malaise: corporate governance and financial management.
"Every company in Japan wants to know what will make them a global competitor," says Shuichi Komori, head of global finance at Japanese securities giant Daiwa Securities Group Inc. With 11 years of experience running Daiwa's business in the United States, Komori thinks the answer lies in a precept of American-style management: "The key is that every board member must consider his top responsibility is the shareholder."
This kind of talk still borders on heresy in Japan, where companies have ruthlessly focused on the top line, not the bottom. The reason for this orientation, says Komori, is that the Japanese board of directors and its executives are typically undivided. Traditionally, directors come from inside the company or from related companies, and therefore have a vested interest in maintaining the status quo.
Not any more--at least at companies like Daiwa, which scrapped its board three years ago in favor of a smaller, so-called executive-style board, with outside directors. What's more, in another nod to U.S. management practice, some Japanese companies have created a new executive position: the CFO.
Most companies in Japan don't have a head of finance. Sony Corp., long considered a maverick in Japan, revamped its board and hired its first CFO only three years ago. Last March, computer giant Fujitsu Ltd., with fiscal 2001 revenues of $37.6 billion (¥ 5 trillion), announced a complete makeover of its board and the hiring of its first CFO, Takashi Takaya. Meanwhile, at Daiwa Securities, Japan's second-largest securities firm with revenues of $3.7 billion, Shuichi Komori became the first-ever head of global finance in 2001.
Why are Japanese companies starting to hire CFOs now? Two forces in particular are at work. First, a series of incremental changes in Japanese corporate law have made it tougher for Japanese companies to fudge their figures. Coupled with the global downturn and razor-sharp competition in overseas markets, profits have nose-dived, sending companies across Japan into crisis mode. For example, capital spending as a percentage of cash flow is expected to slip to 63 percent at manufacturers this year, its lowest level since 1981.
Second, Japan's ailing banks simply can't afford to carry their customers through today's fires, whether they are members of the same keiretsu (corporate group) or not. These forces are starting to take a toll; the number of failed companies in Japan in the first three months of 2002 hit the third-highest quarterly level since World War II. Electronics companies alone wrote off more than $15 billion from their balance sheets this past spring.
Such defensive actions are just the beginning of a real restructuring of Corporate Japan, which could take anywhere from 3 years to 30. But the process is lurching in the right direction. And if managers of troubled Japanese companies don't face up to their problems, their banks, rapacious foreigners, and in some cases their own shareholders are starting to scare up ways to take those companies off their hands.
Disclosing Daiwa
Facing up to problems means more disclosure--easier said than done, given the penchant for secrecy in Japan's business culture. But it must be done, says Komori. "Transparency helps us," he declares.
Today Daiwa has one of the highest standards of corporate disclosure in Japan. It's also working hard on cleaning up its balance sheet; recently it wrote off more than $1.1 billion through the sale of its property management business and a revaluation of its securities portfolio. Komori has centralized the group's cash management, upgraded its IT, and put a rigorous risk management system in place that monitors Daiwa's risks on a daily basis. The result for the fiscal year just ended was a sumo-sized net loss of nearly $1 billion (¥ 130.5 billion). But analysts expect Daiwa to bounce back in the current year, for which they project profits of $345 million on sales of $4.6 billion.
Overseas fund managers have noticed, upping their stake in the company from 17 percent three years ago to 32 percent today. Still, Komori's job is far from finished. His big goal is to raise Daiwa's barely investment-grade rating of BBB/BBB+ and lower the securities group's cost of capital. But that won't happen if risk-averse Japan can't be coaxed back into the capital markets. "To revitalize Corporate Japan, we have to revitalize the Japanese capital markets. To do that, there needs to be an ability to address risk," asserts Komori. That's where the CFO comes in, and why Japan needs more of them, he says.
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