Keynote Address by Angel Gurría
15 April 2015
(As prepared for delivery)
Dear Mr. President Iwata [of JCER], Mr. President Kiyota [of Tokyo Stock Exchange], distinguished guests,
I am honoured to address you today on ‘new growth strategies for developed economies’, as part of this International Symposium on Corporate Governance and Japan’s Growth Strategy.
This gets right to the heart of the matter: corporate governance is not just a question of ethics, of management or even of profitability – it’s much more important than that. Fundamentally, good corporate governance is critical to unlock investment, growth and jobs in Japan and other advanced economies.
A little later this morning, I will launch the OECD’s 2015 Economic Survey of Japan alongside Ambassador Kodama. The over-arching message is one of cautious optimism: the Japanese economy is growing again, and the combination of lower energy prices and higher wages should feed through to a further pick-up in GDP growth in 2016.
But, there remain significant challenges ahead. The survey focuses on the twin priorities of achieving faster economic growth through structural reform – Abenomics’ ‘third arrow’ – and putting government debt on a downward trajectory. These priorities are more important than ever given growing demographic pressures.
Improved corporate governance is at the heart of Abenomics’ all-important ‘third arrow’, making today’s conference very timely and important. The 2014 Japan Revitalisation Strategy recognises, for instance, that corporate governance reform is necessary to address the longstanding problems of low profitability and high cash holdings in the Japanese business sector.
Recently, Japan has had path-breaking achievements in this area. In particular, the Stewardship Code was issued last year, while the Corporate Governance Code will be concluded in the coming months. These are important steps towards world class corporate governance.
I am particularly pleased to note that Japan has modelled its Corporate Governance Code on the OECD Principles on Corporate Governance, showing how the OECD and Japan work towards shared objectives. The Code is based on the understanding that corporate governance is not an end in itself, but a means to foster economic growth. This is the kind of practical, outcome-oriented approach that the OECD has long advocated, and we were happy to put our expertise at Japan’s disposal during the preparation of the Code.
Japan has also played an important and very constructive role in the ongoing review of the OECD Principles of Corporate Governance. When finalised in a few months, they will be submitted to the meeting of the G20 Finance Ministers and Central Bank Governors in September for transmission to the G20 Leaders’ Summit in November.
Here in Japan, as I alluded to earlier, corporate governance reform is taking a “two wheels” approach:
One important feature of the Corporate Governance Code is the greater role foreseen for independent directors. The Japan Revitalisation Strategy encourages companies to use independent directors to stimulate corporate creativity and long-term value creation, as well as active communication with investors. After years of debate, Japan has finally reached a consensus requiring companies to appoint at least two independent directors under the “comply or explain” framework of the Code. This could be a game-changer!
A second notable feature of the new Code is the recommendation that listed companies disclose their policy on, and the long-term economic rationale for, cross-shareholdings. The widespread use of cross-shareholdings in Japan has long given rise to concerns that they are not used purely for investment purposes, but rather to strengthen control of related businesses and to reinforce business relationships. This has led to a hollowing out of capital, and has weakened minority shareholders’ rights. The disclosure requirements of the Code are therefore a step in the right direction.
Reforming corporate governance should not stop at the development of Codes. Implementation is critical and requires an ongoing process of monitoring and evaluation. And to be relevant and effective, corporate governance rules and regulations need to adapt to structural changes in both the corporate and the financial sectors.
The way we save and invest has changed greatly, with ever larger pools of collective investment using passive investment strategies in the form of indexing and exchange traded funds. This trend has been accompanied by a surge in new types of investors, asset managers, service providers and investment strategies.
The most immediate effect is that we now have a longer and more complex investment chain, which can reduce the returns to households, increase the cost of capital for the real sector and weaken incentives for long-term, productive investment. Some of these concerns are addressed by Japan’s new Stewardship Code. It encourages investors to be better informed and to engage in a dialogue directly with companies to improve the returns to their clients and to ultimate beneficiaries. As of March this year, 184 institutional investors from Japan and abroad had already signed up to the Code. We hope to see Japan build on this forward momentum with the implementation of the new Corporate Governance Code later this year.
Ladies and gentlemen,
Improvements in corporate governance will not only stimulate corporate productivity, profitability and competitiveness, which are critical to boosting Japan’s growth rate. They will also increase confidence among both domestic and foreign investors. An important outcome of this new business dynamic would be that companies with large cash holdings find ways to proactively use their retained earnings for new capital investment.
Our joint work on corporate governance is a shining example of how Japan and the OECD can be more than the sum of their parts when they work together. We look forward to further deepening this bilateral engagement in the pursuit of better corporate governance frameworks, and better policies, for better lives in Japan, across Asia and throughout the world.