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Over the past 10, eye-straining years, annual Japanese imports of contact lenses have soared by more than 60 per cent. Smartphone saturation and a fashion-led shift away from glasses are the propellants on the demand side. Japan’s historically modest production of contact lenses explains the large domestic supply deficit.
A potentially transformational flow of chief financial officers, from the CFO-rich outside world to resource-poor Japan, could now follow a similar (but more rapid) path. The investment world is currently fascinated by Japan; the country’s corporate financial eyesight is failing; the answer is imports.
Japan’s CFO supply-demand imbalance is a chronic problem that has suddenly become acute, in significant part because of state-sponsored governance reform, recent changes to mergers and acquisitions guidelines and a push for greater capital efficiency led by the Tokyo Stock Exchange itself. In a recent study Toshiyuki Kobayashi, at Teikyo Heisei University, found that only 33.2 per cent of companies in the TSE’s Prime section had a dedicated CFO, and that low price-to-book ratios were more or less standard for those without one.
But the issue is as much philosophical as it is numerical. Many Japanese holders of the CFO title are not CFOs in the sense the role is understood elsewhere. The discrepancy helps explain why, to outside observers, Japanese companies can seem so very differently constituted and run from their US counterparts, and why companies’ engagement with shareholders so often ends in frustration.
It also helps explain why Tokyo stocks are now atop the priority watch list of activist investors, private equity funds and, as demonstrated by Alimentation Couche-Tard’s $47bn bid for Seven & i, overseas corporate buyers. That money is looking for undervaluation, disposable non-core assets and easily achieved improvements in capital efficiency, all of which have proliferated in a CFO-light environment.
Japan’s CFO deficit is a product of traditional company structures. A given Japanese company’s most senior officer in charge of finance is, in most cases, someone who has simply risen through the accounting department. Many summit as superb financial comptrollers; many have evolved through the bleakness of Japan’s “lost decades” into world-class cost-cutters and cash hoarders; set them a target and it will be met. But that is where they have stopped and stood still. As one long-term investor puts it, a Japanese CFO will perfectly maintain a given balance between equity and debt, but will not be part of the conversation or conceptualisation of the ideal balance between the two.
Japanese CFOs are not often active participants in the big strategic discussions of their company’s direction. They are rarely business school graduates with views on how financing should be woven into corporate DNA. Many are not formally executives, or on the board of directors. They are usually not closely entwined fellow travellers of their CEO, and do not tend to be natural successors to the top job.
In 2008, Japan implemented its equivalent of America’s Sarbanes-Oxley Act, which required more detailed financial reporting and evidence of stricter internal controls, with both needing sign-off from “the head of finance”. To clarify who that was, many companies bestowed a CFO title, without necessarily reimagining it as a distinctive role. There was, notes Kobayashi, a brief boom of CFO-creation, which rapidly fell off.
The problem is that the current generation of investors in Japan expects to speak to a “real” CFO with views. Someone who not only speaks but fundamentally wakes, sleeps and thinks in the same shareholder-focused language of weighted average cost of capital, return on invested capital and so on.
Whether Japan likes it or not, the investors are in the ascendancy, and this particular demand cannot be ignored much longer or satisfied with the current offering. Japan has entered the age of the CFO, without a substantial domestic pool of people qualified or itching for the role.
The most immediately practicable solution, as with contact lenses, is to accept that there are certain specialist products that Japan cannot make on its own and to import the best from overseas. Mass imports of foreign CEOs would encounter significant friction within many companies and are not, in fact, especially needed. Mass imports of foreign CFOs, though, would simultaneously fly under the social radar while igniting an unmissable homing beacon for investors.
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