Keidanren office building, Tokyo.
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Corporate activity involves a broad range of stakeholders, including management, employees, customers, business partners, local communities, and shareholders. Designed to balance these interests, corporate governance seeks to strengthen corporate activity and long-term value. In recent years, however, criticism has grown that shareholder influence has become excessive, distorting how value is allocated. How, then, should corporate governance reform proceed from here?
To explore this question, we spoke with Tetsuro Tomita, Vice Chairman of Keidanren and Senior Advisor to JR East, a position second only to the organization's chairman.
Reining In Share Price–Focused Management
From a corporate governance perspective, what is your assessment of today's listed companies?
In principle, stronger corporate governance should foster sustainable corporate growth. In practice, however, many companies appear excessively focused on metrics such as share prices, ROE (return on equity), and PBR (price-to-book ratio). This has encouraged an overemphasis on shareholders, while employee wages have failed to rise adequately.
The same imbalance is also evident in capital expenditures and in research and development investment.
Some activist investors press management to boost indicators like ROE and PBR. Of course, these metrics are important. But restraining wages and cutting back on investment can inflate profits, improving such figures in the short term. The question is whether that approach truly serves the company's long-term interests.
Does the relentless pursuit of numerical targets produce harmful side effects?
There is no denying that share prices have risen. Compared with the beginning of the second Shinzo Abe administration, the Nikkei Average has increased roughly fivefold. Wage levels, however, have remained stagnant for many years. And although nominal wages have risen by a few percent annually in recent years, real wages continue to decline.
In a healthy economy, share prices should rise in tandem with growth in nominal GDP. Instead, GDP struggled for years and has only recently reached the ¥600 trillion JPY ($4 trillion USD) mark.
What concerns me most is the erosion of the middle class that has long underpinned the Japanese economy. Keidanren's analysis of household income shows that the median fell from ¥5.05 million ($33,700) in 1994 to ¥3.74 million ($24,900) in 2019. The widening of income disparities is unmistakable.
Warning Against Excessive Share Buybacks
What is your view of the growing reliance on share buybacks?
The current scale of share buybacks is clearly excessive. Recent estimates put the total at around ¥20 trillion ($135 billion). Consider what that means: it amounts to roughly 3% of Japan's approximately ¥600 trillion ($4 trillion) GDP. If even a portion of those funds were directed toward capital investment, wage increases, or allowing suppliers to pass on higher costs, the economic impact would be considerable.
The same is true for research and development. There is no shortage of areas that warrant investment. Semiconductors, GX (green transformation), DX (digital transformation), among others.
Share buybacks can serve legitimate purposes, and I do not reject them outright. However, buybacks undertaken solely to boost ROE are misguided.
The prevailing tendency to applaud all share buybacks should be reconsidered. Allocating resources in a balanced manner is ultimately the responsibility of management.
What do you see as causes of this situation?
The influence of guidelines issued by the government and the Tokyo Stock Exchange cannot be overlooked. One example is the Ito Report released by the Ministry of Economy, Trade and Industry in 2014, which proposed an ROE target of 8%. Yet ROE varies widely across industries and should not be applied uniformly.
Consider JR East. Over the roughly 30 years since the Great Hanshin–Awaji Earthquake, we have invested more than ¥1 trillion ($7 billion) in safety measures, including seismic reinforcement. These investments do not directly generate profits, but they are indispensable. If we were to scale them back, profits and ROE would certainly rise, but it is difficult to believe such a decision would be justified.
Around a decade ago, the Financial Services Agency introduced the Stewardship Code and the Corporate Governance Code in an effort to encourage dialogue between shareholders and management. In practice, however, many Japanese executives chose to comply rather than truly explain.
The governance code was originally intended to enhance medium- to long-term corporate value. I would like to see its design reconsidered so that it truly serves that purpose. The Tokyo Stock Exchange's 2023 request for "management that is conscious of capital costs and share prices" further reinforced the tendency to prioritize share prices and efficiency.
So what should be done?
What is needed is autonomous governance. Companies should be assessed not only on ROE and PBR, but also on metrics that reflect personnel costs, depreciation, and investment in research and development. Management should not treat the views of institutional investors as unquestionable, but instead allocate value among stakeholders and pursue proactive investment based on its own judgment.
That approach demands resolve from corporate leaders. Encouragingly, more figures within Keidanren are beginning to share this perspective. It represents a "missing piece" of the "earning power" envisioned under Abenomics, and one I hope will be taken up under the Takaichi administration.
Highlighting Corporate Social Value
How were the perspectives you have outlined shaped?
Over the past 15 years, JR East has faced two major management crises: the Great East Japan Earthquake and the COVID-19 pandemic. Recovery from the earthquake alone took nearly a decade. During that time, we devoted ourselves to restoring key lines such as the Joban Line in Fukushima and surrounding areas, and the Senseki Line in Miyagi.
When service was finally restored, large numbers of local residents gathered at the reopening ceremonies and celebrated with us. Those moments underscored the fact that railways have the power to support communities and lift people's spirits. They carry social missions and responsibilities that cannot be measured solely in terms of efficiency or economic value.
Corporate leaders must recognize that creating social value, not only economic value, is an essential part of a company's role. Management should therefore be conducted proactively and autonomously, from a medium- to long-term perspective, and with a strong sense of social responsibility.
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Author: Hironori Kato
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