July 11, 2002

[talk] How Has the Big Bang Scenario Gone Wrong?

Yoshimasa Nishimura : Professor for the Asia-Pacific studies of the Waseda University

Yoshimasa Nishimura has been a professor for the Graduate school of Asia-Pacific studies of the Waseda University since 1997. His published works include Kinyugyosei no Haiin (Factors behind Financial Administration Failure) and Sekai no Chushin wa Mawarimochi (Rotating Center of the World). He was Director General of Banking Bureau in the Ministry of Finance from 1994 to 1996. He graduated from the Law Department of Tokyo University in 1963.

Paul Sheard : Managing Director, Chief Economist, Lehman Brothers Japan

Paul Sheard is managing director and chief economist at Lehman Brothers Japan. He has held faculty positions at the Australian National University, where he earned his PhD, and Osaka University, and has held visiting positions at Stanford University and the Bank of Japan Institute for Monetary and Economic Studies. His published works include Main Bank Shihonshugi no Kiki (Crisis of Main Bank Capitalism) and Kigyo Mega-Saihen (Mega-reorganization of Companies).

Shoichi Royama : President of Takaoka National College

Shoichi Royama has been president of Takaoka National College since 1998. He now also sits on the Financial Services Agency's Financial System Council and the Central Council for Financial Services Information. His published works include Nihon no Kinyu System (Japan's Financial System) (awarded the Mainichi Shimbun Economist prize) and Kinyu Jiyuka (Financial Liberalization).

In November 1996 when then Prime Minister Hashimoto put forward Japan's version of Big Bang financial deregulation, the financial industry was expected to undergo reorganization and consolidation. Between the Foreign Exchange Control Law revision in 1998 and the partial lift of a freeze on the payoff limited deposit protection in April this year, Japan has implemented various deregulation measures. But Mr. Royama says: "The Big Bang financial deregulation has yet to be successful. This is because the government has been preoccupied with how to set excellent stages and has failed to develop professional market players." This remark represents a dominant view. As the banking system has yet to be stabilized, calls have emerged for postponing next April's full lift of the freeze on the payoff limited deposit protection.

What has led the Big Bang scenario to go wrong? Views on causes and effects are mixed. Mr. Nishimura says: "When the housing loan company problem was solved, Japan was optimistic that the bad loan problem had peaked out and it tackled various problems positively. But Japan has run after two goals and attained neither." As a result, Japan's Big Four banking groups have failed to reform their structurally low profitability. "As far as bank deposits remain fully protected, the government will continue to shoulder risks involving financial assets of households," says Mr. Sheard. This is the reason why Japan has failed to develop free and fair market disciplines.

The most serious problem with the Big Bang deregulation may be "policymakers' failure to work out a clear reform vision that has been required primarily," says Mr. Royama. Financial Services Minister Yanagisawa's private panel on a future vision of the Japanese-style financial system and administration has depicted a vision for a market-based financial system in its recent report, says Mr. Royama. The vision does not include the presence of banks or the concept of banking. This apparently means that unless drastic measures are taken, Japan will remain unable to reinvigorate its financial industry.

投稿者 gnpo : 12:43 PM

[talk] How to Reconstruct the Big Bang

Atsushi Saito: chairman of Sumitomo Life Investment

Atsushi Saito is chairman of Sumitomo Life Investment. His published works include Kabuto-cho kara Wall Gai e ' Ase to Namida no Globalization (From Kabuto-cho to Wall Street ' Painful Globalization Efforts) and Yume wo Takusu (Have Dreams). Saito graduated from the Commercial Science Department of Keio University in 1963.

Sumio Sano: Advisor and Supervising Officer for Corporate Environmental Affairs at Sony Corp.

Sumio Sano became advisor and supervising officer for corporate environmental affairs at Sony Corp. in 2002, after serving as managing director at Sony and chief executive officer of Sony Precision Technology. He is also a member of the committee for assessment of independent administrative agencies and the policy assessment committee at the Ministry of Environment. He graduated from the Law Department of Waseda University in 1961.

Kiyoshi Tsugawa: Chairman of Lehman Brothers Japan

Kiyoshi Tsugawa is currently the chairman of Lehman Brothers Japan. He started his business career with Bank of Tokyo. After serving as director and general manager of the Capital Market Division No.1 at the Bank of Tokyo and then president and chairman of S.G. Warburg(Japan)(1987-1995), he assumed the present position In 1995. He Is a graduate of the Law Department of University of Tokyo.

Michio Matsui: President, Chief Executive Officer, Matsui Securities Co.

Michio Matsui has been since 1995. He has authored O Yannasaiyo demo Tsumannnaiyo (Do It, but It Won't Be Interesting). Mr. Matsui graduated from the Economics Department of Hitotsubashi University in 1976.

Japan's Big Bang financial deregulation ended without sufficient achievements in fiscal 2001. Why have expectations changed into disappointments? Four securities market stakeholders-Matsui Securities President Michio Matsui, Sumitomo Life Investment Chairman Atsushi Saito, Lehman Brothers Japan Chairman Kiyoshi Tsugawa and Sony Advisor Sumio Sano have discussed what are required to reconstruct the Big Bang. Their common view is that "the Big Bang has failed to achieve most of its initial goals and the securities market is still illiquid and inactive " One said, "Japan's capital market is truly going to die."
On reasons for the failure, Matsui and Tsugawa say, "Japan had neither ideas on free, fair and global trading nor visions or policy guidance to implement a fundamental shift from indirect finance to direct finance." Saito says, "While fundamental reforms have made progress on the securities market, the private sector has failed to take action." Sano says, "The Big Bang has emerged from ideas of the financial industry and failed to give considerations to customers."

In order to make a breakthrough in the current situation, the four say, "Japan should return to the starting point of the Big Bang, confirm its goals and implement it again." They also say: "It is important for the industry to develop customer-oriented rules and monitoring systems in order to restore customers' confidence. Unless private sector players take decisive actions as the responsible participants of the capital market, however, the situation will never change.

投稿者 gnpo : 12:35 PM

[interview] Exclude Political Intervention, Enhance Deregulation " Reassessing the Financial Big Bang "

Eisuke Sakakibara: Professor of Keio University, Director of the Global Security Research Center

Eisuke Sakakibara is now a professor at Keio University and serves as director of the Global Security Research Center, being engaged in an analysis of global markets including Asia. Sakakibara graduated from the Economics Department of Tokyo University in 1964 and received his Ph.D. in economics from Michigan University in 1969.

Japan's Big Bang financial deregulation had been aimed primarily at liberalizing the financial industry. In this respect, the promotion of non-financial and foreign firms' entry into the financial industry has been a success. However, it was a great mistake to delay an introduction of a limit to the deposit protection under political pressures.
The Ministry of Finance spun off the Financial Supervisory Agency (now the Financial Services Agency) as an independent organization for inspection and supervision of financial institutions in order to put an end to the so-called convoy administration for the financial industry. The FSA should not succumb to political pressures only to repeat past mistakes or lose its goal. On the other hand, it was unexpected that the financial industry has failed to attract more customers or funds in spite of increasing newcomers.

There may be three factors behind the failure. First, bank management had lacked know-how or efforts. They had been required to take leadership in internal reforms, including outsourcing of computer system operations, from the global viewpoint. Banks had to dispose of cross shareholdings faster. Preoccupied with past relationship, however, they have failed to do so. The Big Bang deregulation should have given banks good opportunities to achieve more fruitful mergers. But mergers have come only among Japanese banks in a "me too" manner. Bank management has been responsible for such mergers. They should have had many other alternatives, including mergers with foreign banks, in order to improve business management and operations.

The second factor has been political intervention. Under the golden slogan of protecting the weak, politicians have forced private banks to undertake the small business protection administration. This is unreasonable. The protection of the weak is the duty of the government. Unreasonable regulations for the protection have prevented banks from setting interest rates at appropriate levels p?to expand their earnings. The FSA should employ its commissioner from the private sector and become more independent in order to exclude political intervention.

The third factor has been securities companies' mistakes. When investors were willing to expand investment, securities companies led them to suffer huge losses. Securities companies have been preoccupied with their defense, failing to make investor protection efforts. Such firms cannot attract customers.

The failure to attract funds for investment is a problem not only for the financial industry but also for the whole of the Japanese economy as a whole. The economy cannot be revitalized unless thorough deregulation is achieved in all regulated industries including distribution, construction and health care, as well as financial services. On politicians who are willing to defend their vested interest, markets should exert pressures and voters should do so through elections. The ultimate conclusion is that Japan should force structural reforms. I wonder Japan has changed since the financial Big Bang?

投稿者 gnpo : 12:32 PM

[talk] Will Japan Reward Challengers in the Future? "Venture Business Forum"

Takaaki Kamei: Dentu Inc. and Senior Staff Member of Media & Contents Strategy Planning Division and executive director of Dentsu.com.

Takaaki Kamei works for Dentsu Inc., serving as a senior staff member of Media & Contents Strategy Planning Division and executive director of Dentsu.com. He is engaged in contents finance and contents business development as well as venture capital business. Born in 1968, Mr. Kamei graduated from the Engineering Department of Tokyo University and entered Dentsu in 1991.

Hajime Tokuda: United Media K.K.

Hajime Tokuda founded United Media K.K. in 2001 for supporting venture businesses, after serving as deputy chief of the business development and planning division of Sumitomo Bank and general manager of the bank's Denen Chofu branch. He is a graduate from the Commercial Science Department of Chuo University.

Keiji Nagano: Director of New Media Japan Inc.

Keiji Nagano is managing director of New Media Japan Inc., engaged in venture investment and support in Japan and the United States. Mr. Nagano graduated from the Engineering Department of Tokyo University in 1980 and received his MBA from Columbia Business School in 1986. Hajime

Japan still sees IPO (initial public offering) bubbles, but accumulation of venture business know-how is limited along with the number of excellent ventures. Ventures themselves tend to depend on big companies. As Japanese business society changes, however, excellent people are increasingly leaving big companies to work in the venture business world.
Based on the Japanese situation surrounding the venture capital market, Mr. Nagano, who has taken charge of venture capital investment in the United States, says: "Compared with the United States, Japan has yet to nurture a wide range of investors accumulating know-how for long-term investment. Japan's venture capital market is very small and limited to speculative investment by a small number of people. This is the problem."

Mr. Tokuda, who has hailed from a big city bank, says: "Banks and other large Japanese companies maintain problematic old-style evaluation systems for assessment of ventures. Japanese banks have failed to take the real advantage of the Big Bang financial deregulation."

Mr. Kamei, who runs a venture investment company, says: "Massive assets owned by an older generation should shift to younger people who are aggressive and willing to undertake investment. Japan has lost its attractiveness as an investment target and allowed massive funds to be invested in foreign government securities. This is one reason why funds for domestic investment are short.

The Big Bang financial deregulation had been designed to develop a securities market that is liquid and attractive for investors. However, funds of individuals have failed to flow into the securities market and financial institutions have yet to respond to the diversification of corporate finances including fund-raising actions. As a consequence corporate fund-raising market is still very small. If the Big Bang deregulation were to be successful, it should be accompanied by reforms of Japan's economic society as a whole, including nurture of sound>? investors, banking business reforms, and change of people's big company-oriented motivation. These reforms may take a long time. Venture businesses should accumulate success stories to create a favorable funding cycle and Japan should transform itself into a country where challengers are appropriately rewarded and supported. Such development may be all the more important.

投稿者 gnpo : 12:28 PM

[talk] Assessment of Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002 and Tax Reform.

Robert Alan Feldman: Chief Economist, Morgan Stanley Japan

Robert Alan Feldman is Morgan Stanley's chief economist for Japan. He previously worked at the Federal Reserve Bank of New York and for the International Monetary Fund. His published works include Nihon no Suijaku (The Weakening of Japan) and Nihon no Saiki (Starting Over). Institutional Investor Magazine ranked him as the top Japan investor in their All-Asia Research Team Poll in 2001. He graduated from Yale University and received a Ph.D. in economics from the Massachusetts Institute of Technology.

Jesper Koll: Chief Economist at Merrill Lynch Japan
Japan Securities

Jesper Koll is a Chief Economist of Merrill Lynch Japan Securities, his work includes Nihon Keizai korekara Ougonkihe. Graduated from Johns Hopkins University.

Susumu Takahashi: Head of the Economics Department of the Japan Research Institute, Limited

Susumu Takahashi heads the Economics Department of the Japan Research Institute. He currently holds positions at the Advisory Group for the Ministry of Finance, the Financial Research Conference of the Japan Fair Trade Commission and the Immigration Control Policy Conference of the Ministry of Justice. He appears on the Television Tokyo program, World Business Satellite. He graduated from the Faculty of Economics at Hitotsubashi University.

Yasuyoshi Masuda: Professor for the Economics Department at Toyo University

Yasuyoshi Masuda is professor at the Economic Depertment of Tokyo University. His major published works include Kinyu Kaikoku (Opening of Japan in the Area of Finance) and Global Money. He is a graduate from the Department of Economics at Kyoto University.

The Koizumi administration has adopted the Basic Policies for Economic and Fiscal Policy Management and Structural Reform 2002, the second package following the first package decided on in June last year. Does the second package include any progress from the first one? Answers are divided into two groups. Feldman and Koll roughly welcome the second package as achieving great progress, while Takahashi and Masuda view it as making no progress or retreating from the first one.
Feldman and Koll praise the second package for including the basic philosophy of reform, specifying measures for the implementation and combining tax and spending reforms. But they point to two shortcomings the failure in specifying spending cuts and tax increases to improve the primary budget balance, and the failure in providing the whole picture of the political process to put policies into practice.

Takahashi and Masuda appreciate the second package for specifying alternatives by touching on taboos like the size-based corporate tax and for offering very reasonable details as qualitative guidelines. But they are concerned that the second package fails to shed light on a medium-term and long-term policy implementation schedule and on how to reconcile short-term economic stimuli to long-term public finance reconstruction.

The four agree that the ruling Liberal Democratic Party's anti-reform group, which calls for short-term economic stimuli and rejects spending cuts, will become a great obstacle to the tax reform, the revitalization of the economy and the public finance reconstruction. They are interested in how Prime Minister Koizumi would demonstrate his leadership and regain the people's support to strengthen his political base, in a fight against the anti-reform LDP group that is geared up for enhancing their movements toward the fiscal 2003 budget formation starting in autumn. The four economists share the view that the fate of reforms depends on Prime Minister Koizumi's political tactics..?

投稿者 gnpo : 12:20 PM

[paper] System to Develop Corporate Governance

Kakutaro Kitashiro: Chairman of IBM the Board of Japan

Kakutaro Kitashiro is chair of IBM the board of Japan. He is a member of the government councils, including Information and Telecommunications Council, executive director of the Japan Business Federation, and vice chairman of the Japan Association of Board Directors. He graduated from Keio University with a BS degree in engineering in 1967. He also holds an MS degree in electrical engineering and computer science from the University of California, Berkeley, in 1972.

Yoshinori Yokoyama: Former Director of McKinsey & Company

JYoshinori Yokoyama is a former director of McKinsey & Company. He now serves as a part-time instructor at Tohoku University and the graduate school of Hitotsubashi University. His published works include Seicho Soshutsu Kakumei (Growth Creation Revolution), McKinsey Gassho Renko Senryaku (McKinsey's Alliance Strategy), and many translations and reports. Mr. Yokoyama graduated from the Architectural Department at the Engineering Department of Tokyo University in 1966, worked for an archictectural firm and received a Master of Urban Design degree from the Graduate School of Harvard University in 1972 and an MBA from the Massachusetts Institute of Technology in 1975.

The Mizuho Financial Group's computer system glitch in April indicated its easy risk management, its lack of internal communications and its loss of a strict management posture, triggering debate on Japanese corporate governance. This is because the lack of governance, as seen at Mizuho, is not unique to banks or mergers. "Japanese companies have lost governance since the 1930s, " says Yokoyama.
What is required for Japanese companies to establish their corporate governance? Can present management establish corporate governance? Kitashiro says, "Companies are owned by shareholders and management is commissioned by shareholders to run their companies." In reality, however,management is seemingly owners of companies, leading us to feel that there may be limitation on reforms by present management. Present companies have effectively lost even the mechanism to fire top management for making misjudgments.

In order to develop corporate governance, "companies may have to reform their management systems themselves," instead of depending on the quality of management, says Kitashiro. He says, "Companies should have outsiders account for a majority of their board members in order to ensure a check and balance system." Yokoyama says, "Develop training programs for management." The emerging pressures on management may trigger the development of corporate governance and correct contradictions in relations between shareholders and management, or between boards of directors and management, which exsist in many of the Japanese companies.

Such prescriptions cannot be expected to immediately improve Japan's corporate management that has lacked governance over the postwar period. If even a few success stories emerge and are positively reported by the media over a long period, however, a rising number of companies will seriously consider developing corporate governance.

投稿者 gnpo : 07:39 AM

[paper] Why Has the Board of Directors Failed to Work?

Hiroyuki Yanai: Executive Director & COO, Japan Association of Corporate Directors

Hiroyuki Yanai, born in 1955, is a member of the Study Group on Complementary Nature of Legal Systems and Management at the Research Institute of Economy, Trade & Industry. He participated in drafting Revised Corporate Governance Principles 2001. He was the co-author of Good Governance, Good Company, and Nihon Kigyo no Corporate Governance wo Tou (Questioning Corporate Governance of Japanese Companies). Yanai is a graduate from the Department of Philosophy of Keio University.

Mizuho's report on its computer system glitch, while specifying the direct cause of the trouble, discusses only technical and field responses to the trouble. It indicates that Mizuho has an intention to regard the problem as an isolated incident.
The core problem is the reason why the board of directors as the top decision-making body failed to work in forestalling or responding to the trouble. But the report indicates that Mizuho has failed to be aware of the distinction between the execution and oversight of management actions and between the management committee and the board of directors. Backing up the indication are Mizuho's documents published upon the merger of the three banks. Offering five principles for the merger, Mizuho pledged to provide comprehensive financial services at the highest levels to customers and business partners. But it failed to discuss the oversight of management actions, the roles of the board of directors, or outside directors.

In contrast, UFJ's documents, which were published almost simultaneously with the Mizuho documents, discuss the board of directors and outside directors from the viewpoints establishing governance structure in order to achieve improved transparency and fairness of management an maximum efficiency at the same time. Unlike the Genron NPO report, the Mizuho report has no focus on the necessity and effectiveness of the mechanism to check management. Mizuho has had six outside directors and statutory auditors elected from outside. What had they been elected and expected to do? Lessons leant from the Enron problem that emerged from the board's failure to work, the United States has begun to tightened requirements for the independence of outside directors. We cannot learn lessons from the Mizuho trouble unless Mizuho specifies what its outside directors and statutory auditors had been expected to do.

Mizuho is also required to review its management. Genron NPO has concluded that Mizuho has lacked management is role ae nd responsibility. We must question why banks had no management or no need for them. In the past when banks had been accustomed to the Ministry of Finance governance, they did not develop people with management skills. Especially for Mizuho where management had been little awareness of governance, the management issue must have been more serious than for other banks.

投稿者 gnpo : 07:36 AM

[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.

投稿者 gnpo : 07:34 AM

[paper] Mizuho Incident Highlights Lack of Bank Management Vision

Makoto Saito: Professor at Faculty of Economics, Hitotsubahi University

Makoto Saito is Professor at Faculty of Economics, Hitotsubahi University. His academic papers have been published in professional journals including Journal of Monetary Economics, Journal of Mathematical Economics, Journal of Economic Dynamics and Control, Journal of International Economics, and Journal of Banking and Finance. He also wrote several books on macroeconomics and financial economics in Japanese. He graduated from Faculty of Economics, Kyoto University in 1983, and received Ph.D. in economics from Massachusetts Institute of Technology in 1992. He taught economics at several institutions including the University of British Columbia, and took his current appointment in 2001.

The Genron NPO survey report indicates that the large-scale computer system glitch at the Mizuho financial group was a natural result in the absence of governance. I basically agree with this report. The current conditions that Japan's bank management is facing indicate that banks have fundamentally lacked management vision.
In Japan as well as other developed countries, we have to accomplish a task of converting management of banks in response to diversification of financial function as a result of rapid development of information and financial technologies. During the course of diversification, divestiture and conbination of banks are inevitable.

What is symbolic in the Mizuho problem is that the system trouble was experienced in the settlement function. Banks have not been charging fees to cover the system and operation costs for their financial settlement services. Settlement services could become an auxiliary earnings base and their positioning is important for bank management strategies.

If Mizuho management have had a clear vision on the settlement services including the new services, the integration of the Mizuho group banks would have provided a great opportunity for the Mizuho group to propose a new fee stracture to customers.

The division of financial function is rapidly diversifying not only for retail services but also for business customer services and is expected to resolve banks' excess presence in loans and deposits. How to respond to the diversification of financial functions, Japanese banks are asked to create that a strategic vision.

If Mizuho might have failed to discuss how to strategically position the settlement services after the integration of the three banks and viewed the services as a loss-losing operation. If so, it would be no surprise to hear that Mizuho did not spend sufficient labor and money for the implimentation of an integrated settlement system as people are preoccupied with negative ideas regarding the turf aand honor of the three banks. Convenience stores, the Internet and others have already launched their own financial settlement services.

Mizuho should take such change into account in its restructuring efforts. Although Various preconditions may be required, for restructuring efforts to cope with the deepening division of financial services, such restructuring efforts under an innovative vision could allow Mizuho to secure its future development.

投稿者 gnpo : 07:33 AM

[paper] Investigative report: the system failure of "Mizuho"

What was the cause behind the Mizuho fiasco? Genron-NPO had released an original investigative report online concerning the system failure of "Mizuho," with an aim to decide a desirable state of management for Japanese companies. We had asked more than twenty members of the "Mizuho" staff to the hearing held in preparation of this report. We decided to disclose this report to the public because we thought that the problem of corporate governance that is found in many of the Japanese companies is condensed in the case of "Mizuho." So, we not only pursued the direct cause of the system problems but also attempted to discuss the core of the problem, the governance of management.
The report first checked three points from the management perspective, besides the direct cause of the system problems: whether the preparation was full and adequate; whether the management understood the progress of the preparation process; and whether any measures for risk management were established. As a result of the hearing, the preparation was revealed to have been quite insufficient and it is highly possible that the company decided to start the system before its completion. Also, it became clear that the management was not sufficiently aware of the state of preparation. Although the field staff reported that they were " not quite confident enough to cope with" the various test results or inquiries from clients, these voices of concern only reached some of the management, and the concern was not a consensus in the management as a whole. In addition, risk management did not foresee a crisis of this level. In the first place, management did not fully understand the importance of the computer system. These factors delayed the decision of an integrated system, and led to the premature start with an incomplete system.

As for the fundamental cause of this chaos, one can point to the delay in organizing a new governance framework because of the prolonged strife to take initiative among the three banksE? in the process of amalgamation on an equal basis. The former management of the three banks continued to hold real power after the amalgamation by also sharing the post of CEO of the holding company. Balance among the three banks also had priority in the area of organization control. In this state, incentive remained low for the holding company and each affiliated bank to communicate and cooperate. These peculiar adverse effects for M&A gradually surfaced in the process of integration. Upper management was also involved in the conflicts of interests. There had also been no mechanism to check such problems under this new condition of control-by-share-holding. It was a typical case of failure in management and the decision-making process; and the confusion that followed can be regarded as an epitome of such a state.

投稿者 gnpo : 07:32 AM

[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.

投稿者 gnpo : 07:29 AM

[paper] Is a Holding Company a System to Conceal Legal Responsibility?

Tatsuo Uemura: Professor of Waseda University

Tatsuo Uemura has been a professor at the School of Law of Waseda University since 1997. His area of expertise is the Corporation Law and the Securities Reguration. Previously, he was a professor at Senshu University and Rikkyo University. His major published works include Insider Torihiki Kisei No Naiki Jirei (Cases of Bylaw for Insider Trading Regulations) and Kinyu Big Bang Kaikei to Hou (The Financial Big Bang - Accounting and Law) (co-written).

The investigative report submitted by Genron-NPO, pointed out that the governing function is weakening with the dispersion of authority and responsibility by the integration of the three former banks Dai-Ichi Kangyo, Fuji and the Industrial Bank of Japan. This report can be highly evaluated that it did not lightly attribute the problem to the responsibility of top management but rather gained a precise understanding of the nature of the problem. However, as a premise of discussion, distinction between governance of the single company and of a holding company is unclear. It is essential to discuss this point separately in order to develop discussion on corporate governance.
Roughly speaking, there are two merits to holding companies. One is that it becomes possible to decentralize decision-making by generating autonomy and independence among subsidiaries. The other is that it is possible to develop strategically sophisticated management through share holding. As set forth in the purpose clause of the Articles of Incorporation of Mizuho Holdings as "business management of the subsidiary companies," of the responsibility of the business of the bank apparently lies with the president of Mizuho Bank. Nevertheless, the responsibility of the president of Mizuho Bank is not questioned outright.

This fact suggests implicitly but clearly the fundamental legal problem among Japanese holding companies, which is that the responsible body for legal and social responsibilities is not one and the same." In Japan, parent companies routinely control their subsidiary companies and absorb their profits, but the directors of the parent companies do not hold themselves responsible to the creditors of subsidiary companies, under the Commercial Code. Also, the directors of the subsidiary company almost never take responsibility directly to the creditors. So, is it possible for the directors of the subsidiary to bear responsibility indirectly through derivative action by shareholders? No, because tauhe parent company is the 100% shareholder. Furthermore, the shareho a holding company is merely a system to conceal legal responsibility.

If we look at the situation overseas, holding companies are usually used only as an emergency measure to overcome administrative disadvantage and the responsibility of the parent and subsidiary companies are unified in most cases. In order to exploit the considerable merits of holding companies, it is an urgent matter to establish business combination legislation with equivalent standards as that of the Europe and the United States.

投稿者 gnpo : 07:26 AM

[paper] Defects of Japanese-Style Management Found in the Case of Mizuho

Sei Nakai: Senior Managing Director, Japan Securities Investment Advisers Association

Sei Nakai has been the Senior Managing Director of the Japan Securities Investment Advisers Association since 2000. Before assuming his current position, he filled several important positions in the Ministry of Finance including Councilor of the Banking Bureau, Deputy Director-General of the International Finance Bureau and General Manager of the Institute of Fiscal and Monetary Policy. His major published works include Yabunirami Kinyu Gyousei (Financial Administration from a Squinted Viewpoint). He received a B.A. in Law from the University of Tokyo and a L.L.M. from Harverd Low School.

The system failure of Mizuho Bank is very similar to the failure of the Japanese military in World War Two. Their points in common are a "disregard of logistics" and a "lack of strategy." The Japanese military of that time was prepossessed with its success in the Japanese-Russo War, and not only relied upon highly capable noncommissioned officers and neglected to modernize weapons, but also disregarded logistics by putting weight on the mental side of the force. It is the same case with the Japanese banks, where the system development was carried forward without serious trouble by highly capable staff. However, the development was completely left to these field staff even after the environment had changed dramatically and required fundamental changes, and the commandant, in other words the management, did not give any specific direction.
Two reasons can be cited for this. One is that, because the system development division had never been a mainstream of one's career track in bank, there was nobody among the management who was aware of the significance of the troubles with the system. Another is that, because working overtime without getting paid for it was becoming a routine, there were ambiguities in the cost accounting. This led to management being unaware of abnormal circumstances such as the rapid increase of overtime being done in the system division.

Upon integrating the systems of the three banks after their merger, they did not make the decision from the strategic point of view such as in terms of which system was most suited for the new age, but decided to seize the initiative as a compromise to inter-group strife. This is also a following in the footsteps of the former Japanese military. This is a common problem among Japanese companies regardless of their business areas, which means that their corporate governance is called into question. Not only can the leadership of top-management not be brought out in emergency, but also the system for shareholders to monitothr for possible management negligence has not been developed enough.

The background to these problems that cannot be overlooked is the lack of a sense of crisis among the management of Mizuho. Because the mega bank, with an asset size of over 150 trillion yen, is too big to fail, its management became bloated.

There are two solutions to this problem. One is to enhance the surveillance function of shareholders, and the other is that banks are supervised more strictly by the Financial Services Agency and the Bank of Japan. Specific and effective measures such as to implement examination by teams consisting of independent experts are desirable.

投稿者 gnpo : 07:24 AM

[paper] Tough Measures are Required in Order to Restore Governance

Toshihiro Shiga: Senior Consultant, the Business Solution Division of Mitsubishi Research Institute

Toshihiro Shiga is a Senior Consultant at the Business Solution Division of Mitsubishi Research Institute. He joined the company in 1985 after working for the Digital Media Development Division of Hitachi. He is a specialist in electronics-related companies, the management of manufacturers and the impact of IT on management.

The spate of system troubles that occurred in the Mizuho Financial Group was chaos on a large scale, which is unacceptable for financial institutes. However, Terunobu Maeda, President of Mizuho Holdings, shamelessly commented in the Diet, "There has been no special damage caused to users." A very grave state of affairs can be suspected from this remark: although the immediate cause of the trouble was defect in the computer system, its root is that the management of Mizuho lacks "self-governance."
Effective corporate governance does not exist without fundamental belief in the top management. For this reason, top management must above all govern themselves. This is a major premise of management. However, in the case of Mizuho, the management was not aware enough of the lack of preparation in incorporating the computer systems. In addition, they even neglected to pay the necessary attention to implementing their governance. Autonomous governance of management will never work in such conditions.

However, a lack of governance among management is not a state of affairs exclusive to Mizuho, or exclusive only to merged financial institutes. Mr. Shiga thinks it is a problem that is now widely seen in companies of any type of industry. He points out that the lack of governance gradually became noticeable after the oil crisis in the 70s, and suggests that the major reason for this is that the management from post-war generation sat idly on the legacies handed down from the leaders of the pre-war period, and rotated those positions among themselves. By using the devastation of Mizuho as a lesson, many companies and their leaders must objectively review their state of governance, as well as rectifying any defects found therein. So, what must be rectified, and how? "Normal" measures such as enhancement of shareholders' rights or the utilization of outside board members is not enough. Thorough information disclosure on actions by management, the infusion of "new blood" into top managementmu positions, the elimination of inertia and force of habit, etc The author insists that these "tough measures" are also required.

投稿者 gnpo : 07:23 AM

[paper] Mizuho should Reconsider the Merger

Yuko Kawamoto: Senior Expert, McKinsey & Company, Japan

Yuko Kawamoto holds a B.A. in Social Psychology from the Faculty of Letters of the University of Tokyo and an M.A. in Economics from Oxford University. Her major published works include Ginkou Shueki Kakumei (Revolution in Banking Profits). She is currently a member of the Finance Service Agency†fs Minister†fs Discussion Committee on the Future Vision of the Japanese Financial System and Administration in Japan.

In the integration process of Mizuho, which extended to two years and seven months, the lack of a sense of crisis among top management and the overgenerous self-evaluation of the effects of the merger had always been regarded as a problem. As pointed out in the report by Genron-NPO, a sense of awareness among the management was far from the reality, which reveals a lack of governance in the management area. Although the report raised questions about the assumption that it will be possible to enhance the degree of integration from within "Mizuho," I think that the integration itself is one of the points in question. Thus, I would like to participate the discussion by once again analyzing the effects of M&As on banks in general.
First, the merits of M&As are usually realized on the cost side, because unit costs are reduced by the use of economies of scale. However, according to the numerical analysis, Japanese banks may benefit little from economies of scale in M&A when the amount of funds exceeds 10 trillion yen. Even so, if the largest cost item, such as system cost, can be reduced, it will contribute to overall cost reduction. However, this is the case when the systems are incorporated into one of the pre-existing systems. The case of Mizuho, which did not employ any of the pre-existing systems after the merger, is extremely rare throughout the world. Although abolishing and merging stores can be highly effective, it is suggested that the work that accompanies it, such as account transfer and others, requires huge amounts of time and labor power. On the other hand, it is becoming apparent that little effect of integration can be expected on the income side. Rather, M&A by its nature requires costs for covering clients' loss and securing qualified human resources, so the effect of the integration will be practically non-existent if a larger integration value cannot be created.

In consideration of the above recognition and the deepness of the roots of the problems presented a?in the report, we ask the fundamental question: Can "Mizuho" continue to operate as an integrated bank? I would say a decision needs to be made after reviewing the framework and considering a new one, while also keeping in mind breaking up the merger as one option.

投稿者 gnpo : 07:21 AM