Since February 2020, the COVID-19 pandemic has thrown financial markets around the world into confusion. In Japan, where the fiscal year for most companies ends in March, routine earnings announcements were upended by the sudden halt in economic activity. Yoshiko Shibasaka, a partner at KPMG AZSA LLC, explains how the pandemic has affected corporate thinking about governance and sustainability in Japan.

The novel coronavirus and related impacts of 2020 were unimaginable a year ago, affecting everything from markets and corporate activity to daily civic life.  Even among managers tasked with anticipating and accommodating risks, the pandemic’s effects on business were unforeseen.

Many, but not all, managers of global companies were caught off guard.  Some companies outside Japan were able to assess the pandemic’s potential to disrupt operations and took decisive action.  Although few could have predicted the pandemic, corporations with short- and long-term contingency plans in place were better able to swiftly approve and deploy them and thereby mitigate the pandemic’s effects.  As they say, “Always be prepared.”

Unfortunately, only a handful of corporations in Japan were adequately prepared.  In February, infections outside China were confirmed and by March, major cities in Europe and the US were implementing lockdowns.  Japanese corporations, most of which close their books at the end of March, faced the gloomy prospect of reporting financial results in the midst of global turmoil.  Despite the urgent necessity of the task, only a few corporations were able to prepare timely and satisfactory roadmaps for what lay ahead.  Shareholders and investors wanted to know how the virus would affect their companies.  Unlike in normal times, stakeholders were not so much interested in data (which was presumably negative) but in management’s thoughts and outlook on how to deal with the pandemic.  In my view, most corporations failed to meet the demands of the moment.

A handful of Japanese corporations did address the pandemic in a meaningful way.  Managers at these companies addressed stakeholder concerns using long-term backcasting, based on the company’s basic mission.  Backcasting requires setting a target for the future and planning how to achieve it.  Forecasting, on the other hand, predicts the future based on an analysis of the current situation and business performance.  In backcasting, top management talks about the company’s purpose in a manner consistent with the perspective of the forecaster who is in charge of practical operations.  I believe companies that engage in both backcasting and forecasting will earn the trust of long-term investors and stakeholders.

As evidenced in the US Business Roundtable’s (BRT) "Statement on the Purpose of a Corporation", 'stakeholder capitalism' is increasingly becoming the norm.  The COVID-19 pandemic has popularized the view that corporations should consider the interests of all stakeholders, and not just of shareholders.  The BRT’s statement does not indicate a conversion or departure from conventional capitalism or that shareholder interests have become secondary.  It represents the now common understanding that a corporation cannot generate long-term profits for shareholders without considering all stakeholders.  Henceforth, managers are expected to explain the company’s mission and how it relates to all of the various stakeholders.


Source: “Statement of Intent to Work Together Towards Comprehensive Corporate Reporting” by CDP, CDSB, GRI, IIRC and SASB

The movement to strengthen corporate governance in Japan is ongoing.  The Stewardship Code was revised a second time in March 2020 and the Corporate Governance Code is expected to be revised again in 2021.  Still, Japan’s corporate governance rating remains somewhat weak internationally.  Even in Asia, Japan’s standing is in decline.  In the Asian Corporate Governance Association’s (ACGA) biennial CG Watch, Japan’s corporate governance ranking fell from 4th in 2016 to 7th in 2018.  Australia topped the list in 2018, followed by Hong Kong, Singapore, Malaysia, Taiwan and Thailand.  The latest rankings will be announced shortly and whatever Japan’s position, ACGA notes there remains a big difference in how Japanese versus other Asian companies interact with investors.  Japanese companies are shielded by extremely low interest rates and retained assets, whereas other Asian companies seeking investment funds face intense scrutiny from investors abroad, from my perspective.

As domestic asset owners increasingly find their voice, Japanese corporations must do more than simply implement the Corporate Governance Code; they must create explanations and systems that satisfy stakeholders beyond Japan.  The traditional sanpo-yoshi philosophy of the Omi merchants (three-way satisfaction: good for the seller, the buyer, and society) has kept many Japanese companies in business for hundreds of years.  Today’s stakeholders, however, include diverse investors and international employees.  In a world that no longer ends at Japan’s shores, a company’s bona fides as a social entity will be judged its efforts to foster empathy.


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