value investing and corporate change…
One of the basic tenets of value investing in the US is that when a company is performing badly, one of two favorable events will occur: either the board of directors will make changes to improve results; or if the board is unwilling or incapable of doing so, a third party will seize control and force improvements to be made.
…hasn’t worked in Japan
Not so in Japan, as many Westerners have learned to their sorrow over the thirty years I have been watching the Japanese economy/market.
Two reasons for this:
—culturally it’s abhorrent for any person of low status (e.g., a younger person, a woman or a foreigner) to interfere in any way with–or even to comment less than 100% favorably on–a person of high status. So change from within isn’t a real possibility.
–in the early 1990s, as the sun was setting on Japanese industry, the Diet passed laws that make it impossible for a foreign firm to buy a large Japanese company without the latter’s consent–which is rarely, if ever, given.
The resulting enshrinement of the status quo circa 1980 has resulted in a quarter century of economic stagnation.
Abenomics to the rescue?
Abenomics, which intends to raise Japan from its torpor, consists of three “arrows”–massive currency devaluation, substantial deficit government spending and radical reform of business practices.
Now more than two years in, the devaluation and spending arrows have been fired, at great cost to Japan’s national wealth–and great benefit to old-style Japanese export companies. But there’s been no progress on reform. The laws preventing change of control remain in place. And there’s zero sign that corporations–many of whose pockets have been filled to the brim by arrows 1 and 2, are voluntarily modernizing their businesses. Mr. Abe’s failure to make any more than the most cosmetic changes in corporate governance in Japan is behind my belief that Abenomics will end in tears.
One ray of sunshine, though.
Japan raised its inheritance tax laws at the end of last year, as the Financial Times reported yesterday. The change affects three million small and medium-sized companies.
The top rate for inheritance tax is 55%, with payment due by the heir ten months after the death of the former holder. This development is prompting small business owners to consider how to improve their operations to make their firms salable in the event the owner dies. More important, it’s making them open to overtures from Western private equity firms for the first time. Increasing competition from small firms may well force their larger brethren to reform as well.
For Japan’s sake, let’s hope this is the thin edge of the wedge.