Introduction
Hello, I will be discussing economic and social issues. Currently, significant changes are occurring in Japan's corporate governance system.
There is one noteworthy point in the revised draft of the Corporate Governance Code announced by the Tokyo Stock Exchange in February: for the first time in world history, the term "economic security" has been included in this code.
Understanding this groundbreaking development is crucial not only for business leaders in modern Japan but also for the general public. This article will explain why this change occurred, what it means, and what is required of us.
The meaning of "economic security": Why is this term important?
First of all, what's remarkable is that this is a world first. While corporate governance codes have previously included descriptions related to sustainability, such as "sustainability," this is the first time the term "economic security" has been included.
This change has profound significance. Traditional corporate governance and economic security based on the interests of specific countries may seem like oil and water at first glance. However, this revision clearly defines that boundary and symbolizes a fundamental change in the way corporations operate.
Of particular note is the addition of economic security to the interpretation guidelines, changing it from being a "responsibility of the board of directors" to "effective oversight of management and directors." Furthermore, by explicitly stating that risk response "can lead to profit opportunities" rather than simply being viewed as an increase in costs, the attitude of management has changed.
This also aligns with the "Economic Security Management Guidelines," and the government is moving towards encouraging companies to make strategic decisions. In other words, the idea is that involvement from a national security perspective should be recognized as an opportunity to realize investments that would be difficult for the private sector to achieve on its own.
How will the Corporate Governance Code change?
The revised code includes the following important changes:
● Streamlined and transparent code
- The number of items has been halved from 83 to streamline the process.We streamlined the complex rules and focused on the substantive content.
- A return to the fundamentals of principle-based thinkingWe prioritize flexible interpretation based on fundamental principles over minute, detailed rules.
- Emphasis on the effective use of cash and depositsIn addition to shareholder returns, we encourage the appropriate allocation of corporate resources.
● Establishment of a risk management system
- Cybersecurity ResponseWith the advancement of digitalization, measures are needed to address the risk of information leaks.
- Measures to address supply chain disruptionsThis manages the risk of supply chains being disrupted due to changes in the geopolitical environment.
- Prevention of technology leakageWe need to establish a system to prevent the leakage of critical technology information.
● A new framework for public-private partnerships
- Strengthening personnel exchangesThis will increase the mobility of personnel between the government and private sector, and aim to create a strategic talent ecosystem.
- Information sharing systemThis will facilitate information sharing between the national security community and private companies.
- Following international trendsRecognizing that public-private investment is a global trend, Japanese companies are also responding accordingly.
These changes are not merely formalities; they indicate a shift in the company's management approach. The "emphasis on profitability" is particularly important, representing a move away from simply pursuing short-term results driven by market pressures to prioritizing long-term growth investments.
Key points you should know
⚠️ "Economic security" is not an excuse for market flight.
The important point is that we don't have to use the phrase "leave it to the market" simply because of economic security. What's required is not a sense of obligation due to a "government request," but rather "content that can be explained from the perspective of profitability and future cash flows."
⚠️ Cooperation with the government is no longer a matter of "do or don't do."
The "crisis management investment and growth investment" initiative advocated by the Sanae Takaichi administration aligns with this revised proposal. It expands the areas in which the government can allocate management resources for national security reasons, providing an opportunity to realize projects that would be difficult to achieve through private sector efforts alone.
⚠️ Be careful of increasing the cost of capital.
A deteriorating geopolitical environment typically tends to drive up the cost of capital. However, if long-term government involvement is recognized, the likelihood of foreseeing and mitigating "downside risks" increases. It becomes important to embrace the concept of a "geopolitical premium."
Some companies may have negative memories of dealing with authorities in the past, but that is an example of failure in the era of globalization. They need to understand that because they left things to the market when they should have been strategically involved, and conversely, intervened when they should have left the market to itself, there is no possibility of them opening up new opportunities again.
Lessons for Management in the Era of Economic Security
As globalization and neoliberalism decline worldwide, corporate governance reforms in Japan are gaining momentum. This movement, which began as a public-private partnership, may have seemed to be lagging behind, but in fact, Japan may now have a chance to take the lead.
Companies can no longer remain detached from traditional "national identities," and they can no longer maintain a position of being unrelated to national interests as they once did. They are now required to play a strategic role at the intersection of economics and national security.
However, a crucial point in understanding this change is that mere superficial responses will not suffice. Within the framework of government and private sector collaboration, it is necessary to connect public-private personnel exchanges to the formation of a strategic talent ecosystem. In some countries, the entire national security community forms an innovation ecosystem. Japanese companies must also strive to avoid falling behind.
A valuable lesson that makes us reflect on the essence of work is the distinction between efficiency and effectiveness. Instead of focusing solely on short-term results, it's crucial to understand the importance of long-term growth investments and allocate management resources appropriately. We need to strengthen the substantive content of "rule-following," which doesn't directly translate to "earning power," so that it doesn't foster formalism.
Japanese companies' low capital efficiency and the productivity improvements needed to attract global investment cannot be achieved through technological innovation alone. Introducing a new perspective of public-private partnerships makes it possible to undertake projects that would be difficult for the private sector to realize on its own. It is important to enhance strategic decision-making capabilities while striking a balance between government intervention and market forces.
Finally, geopolitical changes tend to push up the cost of capital. However, if long-term government involvement is recognized, the likelihood of foreseeing and mitigating "downside risks" increases. There are persistent doubts that "government officials have no discerning eye" and "lack awareness of profitability," but now we are at the stage of considering "how to do it."
In this era of economic security, Japanese companies need to adopt a new perspective that goes beyond mere compliance, focusing instead on strategic growth investment. Within the framework of government and private sector collaboration, it is necessary to foster the exchange of public and private personnel to create a strategic talent ecosystem. Some countries have entire national security communities forming innovation ecosystems. Japanese companies must strive to avoid falling behind.
In summary, the introduction of a new perspective—economic security—into corporate governance indicates a fundamental shift in the way companies operate. It demands not only the pursuit of short-term results, but also a greater emphasis on long-term growth investments and the appropriate allocation of management resources. Within the framework of public-private partnerships, strategic decision-making capabilities must be enhanced through personnel exchanges and information sharing, while simultaneously preparing for rising capital costs and adapting to changes in the geopolitical environment. Japanese companies, as part of global trends, should begin preparing to navigate the waves of this new era.
