[interview] How to Restore Governance in a Bank

Tatsuya Tamura: President, Global Management Institute, Inc.

Until July this year, Tatsuya Tamura was the Chairman of A.T. Kearny, Inc. since 1996. He also holds the position of Chairman of the Committee on Reform of the Postal Savings System of the Keizai Doyukai (Japan Association of Corporate Executives). His major published works include Corporate Governance - Nihon Kigyou Saisei E No Michi (The Road to Recovery for Japanese Companies). He received his B.A. in Law from the University of Tokyo, and received his M.A. from the University of Pennsylvania.

Many Japanese companies are now becoming like pilot-less airplanes, lacking the ability to govern their own companies. Referred to as a convoy system, Japanese companies were managed for a long time under the regulations and shelter provided by the government. Banks, in particular, whose management was supervised by the Ministry of Finance and Bank of Japan in the times when this convoy system was dominant, have now lost those systems of being monitored by the government or central bank, because of financial deregulation.
At a time when companies' management is becoming more unique because of deregulation, shareholders normally fulfill the role of supervisors. However, this system is not working in Japan. Therefore, Japanese companies still lack a mechanism to objectively assess management and rectify decision-making mistakes. This is one of the root causes for the delay in management reform among banks.

Business judgment, such as expanding the size of a company through M&A and improving competitiveness is, in general terms, not necessarily wrong. However, this is based on the premise of "selection and focus." In other words, it is a business judgment to assess which business, store or human resources are essential, and to discard of those that are not. In order to implement such judgment, there must be only one control tower, because one cannot decide to abandon anything if there are several commandants.

A single control tower should judge items value to the business and discard anything that should be abandoned. This is the mechanism of governance. It is the Board of Directors, which represents the shareholders, who establishes such a control tower and approves important business judgments.

However, in the case of Japanese companies, outside board members cannot serve major roles on the Board of Directors because silent shareholders are dominant. Thus, executives that make mistakes are rarely replaced. Under these circumstances, it may be inevitable for abthe Financial Services Agency to decide on personnel changes in troubled banks. There may also be a measure such as to infuse private sector money including foreign investment funds, as well as public funds, to those banks where capital deficit is discovered by strict examination, and to recruit new executives based on the decision of funds for these banks.