Japanese management is overly conservative, and outside investors have relatively little influence because (1) corporate stock cross-holdings entrench management, (2) Japanese companies have very low return on equity (ROE), and (3) outside investors value cash (and other assets) on the balance sheet at 50% of face value, which leads to (4) very poor corporate performance and little pressure on management to improve.
While readers of Strategic Finance might not be investors in Japanese companies, Yanagi’s overall message is relevant to U.S. financial managers. The author is a professor at a prestigious Japanese university, the CFO of a very profitable pharmaceutical company, and an active influencer with IMA Japan. He brings both practical and theoretical knowledge to the topics of corporate governance and creation of value, and American management can learn from him.
The one caveat is that his basic recommendation—that Japanese companies should strive for an 8% ROE—essentially would only bring them up to the ROE of a typical U.S. company today. Real competition and the threat of a hostile takeover have caused most U.S. firms to currently achieve or exceed his recommended minimum 8% ROE.
The low ROE of Japanese firms, according to Yanagi, has destroyed value, while increasing ROE to his minimum 8% will go a long way to correcting the balance. The real issue, however, is getting Japanese managers to get out of their existing comfort zone and working to enhance corporate value by increasing ROE. In turn, this requires better capital budgeting and monitoring of current corporate performance by management.
In the United States, so-called activist investors keep company management on their toes. This book provides strong support for demanding shareholders and is a reminder to executives everywhere not to get complacent.
November 2018
