[paper] Mizuho Issue and Japan's Corporate Governance

Nicholas E. Benes: President of JTP Corporation

Nicholas E. Benes is President of JTP Corporation, a boutique investment bank in Tokyo specialized in financial advisory services, especially M&A advice. He has contributed many articles to newspapers and magazines, including the Wall Street Journal. Mr. Benes has a B. A. in political science from Stanford University, and received his MBA and JD (law) degrees from the University of California, Los Angeles. He is a member of the bar in New York and California, and serves as Chairman of the FDI Committee of the ACCJ.

Two and a half years after Dai-ichi Kangyo Bank, Fuji Bank and Industrial Bank of Japan announced their merger in August 1999, their Mizuho Financial Group had been expected to launch a maiden voyage on April 1 this year. On that day, however, a serious computer system glitch attacked the group and devastated its credibility.
The Mizuho problem has symbolized Japan's lack of corporate governance. Former chief executive officers of the three banks and the present CEO have come under fire. But their dismissal alone cannot put an end to the problem. Unless the problem triggers a governance reform for the whole of Japan, the Japanese economy will fail to overcome the current serious difficulties.

There have been fundamental problems behind the Mizuho trouble. Shareholders and the board of directors have failed to check and oversee management. The group has lacked a business culture that encourages employees to report even negative information to top management. Stakeholders, including shareholders, employees and customers, have failed to aggressively make opinions. Management have looked at regulators rather than stakeholders. People who have no experience or knowledge on mergers and acquisitions have led the merger. These problems are not unique to Mizuho but common to many Japanese companies. They stem from the underdevelopment of corporate governance.

In Japan, corporate governance is misunderstood only as a system to introduce outside directors to assess chief executive officers. Corporate government is not limited to such system. It represents relations and communications between stakeholders, including shareholders, employees and customers.

Stakeholders must discuss their duties to develop the check and balance mechanism and decision-making rules into satisfactory ones for themselves. General society is also an indirect stakeholder in a sense that it is affected by the failure of any company. Here is the requirement for investors to improve corporate govonernance.

We must correct our interpretation of corporate governance before considering legal and other institutional reforms that should specify the financial duty of institutional investors and liberalize proposals by shareholders.