The Econmist - USA (2021-10-30)

TheEconomistOctober30th 2021 Business 77

Troublebrewing

TheprofitscrankedoutbyAmericanbusinessesmakethemlookindestructible.De-

spitea pandemicandsavageslumpin2020,thenetincomeoflargeAmericanfirmsfor

thethirdquarterofthisyearisexpectedtoexceed$400bn.Yetastheearningsseason

getsintofullswingthreeworriesarecirculating:supply-chaintangles,inflationand

wages,andconcernsthatcompetitionisintensifyinginsomeindustries

America Inc

S&P 500

Sources:RefinitivDatastream;FactSet;TheLeutholdGroup *Estimate

200

150

100

50

0

2020 202

Indices,Januaryst2020=00

Technology

Energy

S&P 500

12

10

8

6

4

2

0

1992 211510052000

Profitmargins,trailingfourquarters,%

Net

Operating 100806040200-20

Net-profitgrowthforecasts

Bysector,%changeona yearearlier 202 2022

Energy

Utilities

Consumerstaples

Realestate

Healthcare

Technology

Communications

S&Paverage

Financials

Consumerdiscretionary

Materials

Industrials

*

25

20

15

10

5

0

211917151311092007

Index, 2-month forward price-to-earnings ratio

5-year average

Ten-yearaverage

Five-year average

Japanesecorporategovernance

Poison-pill

popping

K

ishida fumio, Japan’snewprimemin­

ister,  has  voiced  no  opposition  to  the

corporate­governance  reforms  of  Abe

Shinzo.  His  predecessor’s  efforts  to  make

Japanese  companies  more  focused  on

shareholder  returns  and  less  beholden  to

insider  management  were  central  to  his

economic reforms. But nor has Mr Kishida

said much in their favour. Proposals for tax

breaks  for  companies  that  increase  wages

have made it into the manifesto of his rul­

ing Liberal Democratic Party, as have refer­

ences  to  the  importance  of  stakeholders

over  shareholders.  That  will  worry  those

who  think  Japanese  shareholder  capital­

ism has not yet gone far enough.

A  new  test  will  provide  more  evidence

of Mr Kishida’s attitude to changing the be­

haviour  of  Japan  Inc.  In  September  sbi

Holdings,  a  financial  conglomerate,  made

an unsolicited takeover offer which would

raise its holding in Shinsei Bank, a regional

lender,  from  around  20%  to  48%.  sbihas

ambitions  to  create  a  Japanese  megabank

through  alliances  and  acquisitions.  The

consolidation  of  the  country’s  multitudi­

nous  small  banks  is  precisely  the  sort  of

change  the  corporate­governance  reforms

were  implemented  to  facilitate.  Shinsei

Bank opposes the offer as it stands, making

it a hostile bid, still an extremely rare event

in Japan. It is willing to defend itself using

a  “poison  pill”  which  would  dilute  sbi’s

holding, subject to shareholder approval in

a meeting on November 25th.

That  puts  the  government  in  a  tricky

position.  It  holds  around  22%  of  voting

shares in Shinsei Bank through the Deposit

Insurance  Corporation  of  Japan  and  the

Resolution  and  Collection  Corporation.

These  institutions  are  involved  as  the  re­

sult of a bail­out long ago of Shinsei’s for­

mer  incarnation.  The  government  cannot

sell  the  stake  because  rules  prevent  mak­

ing  a  loss  on  Japanese  taxpayers’  invest­

ment, but it can vote on the poison pill. 

Approval,  rejection  or  an  abstention

would  offer  some  fresh  insight  into  the

government’s appetite to press ahead with

reforms  that  have  brought  a  number  of

welcome  changes. The  prevalence  of

cross­shareholdings has declined. Among

non­financial companies listed on the To­

pix  100  Index,  the  total  number  of  shares

held  in  this  way  dropped  by  around  20%

between March 2013 and March 2020. The

proportion of all listed firms adopting an­

ti­takeover  measures  has  also  fallen  from

19% in 2012 to 8% last year. Over the same

period, the portion of companies without a

single  outside  director  went  from  45%  to

1%. It seems to have worked. Profits (mea­

sured  by  a  common  Japanese  accounting

standard) as a proportion of sales reached

6% shortly before the pandemic, the high­

est level since records began in 1950s. 

There  is  still  room  for  improvement

says  Nicholas  Benes  of  theBoard  Director

Training Institute of Japan. He regards dis­

closure as a crucial area where a change of

policy  could  yield  significant  results.  In

June  the  country’s  corporate­governance

code  was  revised  to  require  listing  the

skills and experience of directors as well as

broadening  disclosure  requirements  for

large listed firms in fields such as environ­

mental  policy.  “This  is  a  jungle  of  largely

unreadable,  sometimes  encrypted  [docu­

ments], written with a variety of different

formats,”  says  Mr  Benes.  Standardising

such publications and making them mach­

ine­readable would be a simple way of im­

proving investors’ access to information.

Greater  scrutiny  can  yield  results.  In

June  Toshiba’s  chairman,  Nagayama  Osa­

mu, was ousted by shareholders following

a  report  that  alleged  that  the  firm’s  man­

agement  and  the  Ministry  of  Economy,

Trade  and  Industry  had  colluded  to  put

pressure on big investors to back manage­

ment at an annual general meeting. (He ex­

pressed  his  regret  at  the  “unacceptable

events”.)  But  efforts  at  reform  often  get

bogged  down  by  Japan’s  bureaucracy.  The

Ministry of Finance, the Financial Services

Agency,  the  Tokyo  Stock  Exchange  and

Ministry of Justice all play a part in intro­

ducing and enforcing new regulations.

Clear  leadership  by  Mr  Kishida  might

help to set a path through the swamp. The

outcome of the takeover attempt at Shinsei

will  show  whether  there  is  still  enough

momentum  to  improve  corporate  gover­

nance or whether old impulses run deep.n

H ONG KONG

Is the appetite for reform waning?