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Scandals May Lead To Reform In Stagnant Corporate Japan, Economists Say

Japanese corporations have been hit with a slew of scandals as of late, from accounting schemes to coverups and falsified data. Some experts believe these troubles are ready to culminate in Japanese corporate reform.

Reports in Bloomberg View on Friday (Oct. 13) pointed to several of these scandals, including Toshiba’s recent revelations that it overstated operating profits by about $1.2 billion over seven years, as well as last week’s uncovering of Kobe Steel’s falsified data on the quality of its metals used in airplanes, trains and vehicles.

According to Bloomberg View, corporations across the country not only have to clean up their acts, but also need to find a way to continue to boost productivity and continue economic growth.

The publication pointed to recent research by Naoshi Ikeda Kotaru Inoue and Sho Watanabe, economists at the Tokyo Institute of Technology, that found investors and independent directors could be the push corporates need to reform. The economists recently released a paper on the “quiet-life hypothesis,” which says corporate managers are likely to maintain the status quo — not make any major decisions, resulting in stagnation at their companies — without shareholder pressure.

Highly regulated industries, run by a few key players and other factors are likely to face such stagnation, and the experts say this is happening in modern-day corporate Japan, reports said, and it’s holding back progress, both for the companies themselves and for the economy. It’s also enabling corporate managers to get away with such lax oversight that has led to many of these recent scandals, reports added.

“To improve Japanese companies’ dynamism, growth and efficiency — and, probably, to reduce the incidence of scandals — the country needs to unleash shareholders against hidebound management,” Bloomberg View concluded.

Reports also noted that, according to data from the Financial Services Agency (FSA) of Japan, corporations have increased the number of independent directors over the last four years, while the FSA recently rolled out a stewardship code to help investors be proactive about influencing corporations.

The efforts seem to be working, reports said, but experts noted it will take years before economists can actually pinpoint how much profit growth among corporates is actually due to these initiatives — and whether efforts to push for progress will result in fewer corporate scandals.

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