As a shareholder, you want to know what is happening with companies you invest in. If there are positive results set to send share values rocketing, or negative reports which could lead to a tumble in prices, you rely on companies keeping you upto-date so that you can make informed decisions. The share markets rely on this as well, so that prices best reflect the true state of affairs at any of their listed companies. But such transparency, however desirable, is not always delivered. There are variations in the levels of disclosures from one firm to another, and between countries. A disclosure needs to be timely if it is to be useful to external investors, but managers may intervene, for instance if they plan to vary their own stock holdings or if the firm is seeking additional funding on better terms. The general presumption is that bettergoverned companies are more transparent to investors. To find out if this is the case, we studied more than 1,700 listed companies in Japan, a country where corporate governance (CG) has been a continuing issue. WHATYOUDON’TKNOW, CANHURT YOUR INVESTMENTS In the past, Japanese firms have not been viewed as particularly transparent to outsiders. They operate in a code law country, with less investor protection and weaker enforcement than in common law countries such as the UK and USA. Japanese firms’ CG typically follows stakeholder CG, which is characterised by insider-dominated boards, substantial crossshareholdings among affiliated firms, and a main bank which provides loan capital to companies in its group as well as being an influential shareholder. Close relationships between stakeholders means information may be communicated privately rather than via public disclosures, and many Japanese companies still inhibit shareholders from attending annual meetings – holding them on the same day. In 2014, just under half of Tokyo Stock Exchange (TSE) First Section firms held their annual meetings on the same day. Following the banking crisis of the early 1990s, cross-shareholding andmain bank ownership have decreased, while foreign ownership has increased. Foreign shareholders emphasise the importance of closermonitoring of management, greater disclosure and improving firm performance. At the same time, the average number of boardmembers has declined and the number of outside directors has risen. Nevertheless the boards of Japanese firms remain insiderdominated, and therefore outside directors’ effectiveness in their role is questionable. Since 2004, the TSE’s CGPrinciples have highlighted the importance of goodCG and transparent disclosure practices. And since 2010, Japanese companies have been able to adopt International Financial Reporting Standards (IFRS); by July 2020, about 200 companies –mainly largemultinationals – had chosen to do so, perhaps indicating a commitment to greater accounting quality and transparency. LET’SMAKE ITCLEAR Our study looked at the frequency and timing of disclosures by firms listed on the TSE’s First Section, and the speed of share price adjustments over a 10-year period frommid-2003 tomid-2013. TSE-listed firms are expected to disclose price-sensitive information publicly in a timely and unbiasedmanner – not to leak it selectively to outside parties. The TSE also highlights the importance of disclosing complete information on important issues impacting on firm performance. One implication is that no disclosure of amaterial (or important) issue should bewithheld or delayed irrespective of whether it relates to good or bad news. The TSE expects timely and complete disclosure. Across our study, Japanese firms released a median of 1.2 documents a month to the TSE, substantially less than the figure of 4.1 documents per month in a previous cross-country study I worked on. This shows Japanese firms are less forthcoming than those in other countries, and other comparisons demonstrated they are slower to release price-sensitive documents. We found that better-governed Japanese companies did make more frequent and timelier corporate disclosures, and that their share prices reflected this information earlier, 36 | indicating that shareholders and potential investors were better informed. However, this only applied to good news disclosures. Whenn there is bad news, the level of CGmakes no difference – and efforts to encourage better CG have not corrected Japanese managers’ reluctance to disclose negative information. Timely disclosure of bad news is more important where the firm faces greater risks of litigation for non-disclosure. In Japan, there is a relatively low risk of litigation around the failure to disclose pertinent information, and managers have the expectation of a job for life. As a result, they have little incentive to build a reputation for credible and timely disclosures. Incentives to do so have grown as foreign investors have sought greater transparency for companies in which they invest, but our results show it is still a major issue. WHATHAPPENSNEXT? While there have been attempts to revise and reinforce guidance on governance in Japan, it has not been successful in producing the timely release of bad news alongside the good. There have been further changes to Japanese institutional arrangements since the conclusion of our period of study. In 2014, Japan’s Stewardship Code was introduced, which aimed to increase the fiduciary responsibilities of institutional investors. Firms were also expected to have at least two independent directors under the TSE’s CG Code, effective from 2015. Additionally, the JPX-Nikkei 400 index was launched in 2014 for the top 400 companies meeting ‘global investment standards’, which include CG and disclosure practices. Membership is perceived as prestigious, and firms may look to improve their CG and disclosure policies to increase their chances of inclusion. The requirement to make timely disclosures under stock market regulations was reinforced in 2018 by the introduction of fair disclosure rules, aimed at preventing selective disclosure to third parties. Following all of these changes, in 2019, a TSE survey showed 99.3%of firms had independent directors, and 33.6% of boards comprise a third or more independent directors. Incentive renumeration for directors – linked to long-term earnings performance – is more frequently used, and yet there are doubts there have been real changes in board culture and practices. Minority shareholders are also becoming more active in taking a stand against firms engaged in corporate wrongdoing, such as filing individual lawsuits against Toshiba. These developments show a continued interest in CG, and yet our own results suggest earlier efforts to improve disclosure practices have not been entirely successful. Firms with better CG –with more independent directors, more influence from foreign investment – are more transparent, but only when it comes to good news. Time will tell whether the more recent changes have a greater effect, but there is a clear need to pay even greater attention to guidelines targeting the earlier disclosure of bad news. FIFTY FOUR DEGREES | 37 DrWendy Beekes is a Senior Lecturer in theDepartment of Accounting and Finance. Her core research interests encompass corporate governance and the link to disclosures and accounting quality. The article CorporateGovernance andTransparency inJapan is authored by Professor Hiroyuki Aman, of Kwansei GakuinUniversity, Japan; DrWendy Beekes, of Lancaster UniversityManagement School; and Emeritus Professor Philip Brown, of theUniversity of Western Australia. It is published in The International Journal of Accounting. w.beekes@lancaster.ac.uk
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