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Over the past 10 years, annual Japanese contact lens imports have increased by more than 60 percent. Smartphone saturation and a fashion-led shift away from eyewear are propellants on the demand side. Japan’s historically modest production of contact lenses explains the large domestic supply deficit.
A stream of potentially transformational financial officers, from the CFO-rich outside world to resource-poor Japan, may now follow a similar (but faster) path. The investment world is now attracted to Japan; the financial vision of state enterprises is failing; the answer is import.
Japan’s CFO supply-demand imbalance is a chronic problem that has suddenly become acute, in significant part due to state-sponsored governance reforms, recent changes to merger and acquisition 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 percent of companies in the Prime TSE section have a dedicated CFO, and a low price-to-book ratio is more or less standard for those that do not.
But the problem is philosophical rather than numerical. Many Japanese people with CFO titles are not CFOs as the role is understood elsewhere. These differences help explain why, to outside observers, Japanese companies can look and operate so differently from their US counterparts, and why corporate engagement with shareholders is often so frustrating.
It also helps explain why Tokyo stocks are now at the top of the priority watch lists of activist investors, private equity funds and, as demonstrated by Alimentation Couche-Tard’s $47bn bid for Seven & i, overseas corporate buyers. The money is looking for undervaluation, non-core assets that can be used and easy to achieve improvements in capital efficiency, all of which have developed in the light environment of CFO.
Japan’s CFO deficit is a product of its traditional corporate structure. The most senior official in a Japanese company in charge of finance is, in general, a person who has only risen through the accounting department. Many peaks are the best financial watchdogs; many have evolved through the bleakness of Japan’s “lost decade” to world-class cost-cutters and cash hoarders; set your goals and you will meet them. But there they stopped and stopped. As one long-term investor put it, the perfect Japanese CFO will maintain a certain balance between equity and debt, but will not be part of the conversation or conceptualization of the ideal balance between the two.
Japanese CFOs are not often active participants in grand strategic discussions about company direction. They rarely graduate from business schools with views on how financing should be woven into the company’s DNA. Many are not officially executives, or on the board of directors. They are usually not closely entwined fellow travelers of the CEO, and do not tend to be natural successors for the top job.
In 2008, Japan implemented the equivalent of America’s Sarbanes-Oxley Act, which required more detailed financial reporting and evidence of stricter internal controls, with both requiring sign-off from the “chief financial officer”. To clarify who is mentioned, many companies give the title of CFO, without having to re-imagine it as a typical role. There was, notes Kobayashi, a short boom of CFO-making, which quickly collapsed.
The problem is that today’s generation of investors in Japan expect to be able to talk to a “real” CFO with a view. People who not only talk but basically wake up, sleep and think in the language of shareholders, they focus on the weighted average cost of capital, return on invested capital and so on.
Whether Japan likes it or not, investors have stepped up, and this particular demand can no longer be ignored or satisfied with the current offering. Japan has entered the age of the CFO, without many people qualified or itching for the role.
The most practical solution, as with contact lenses, is to accept that there are certain specialist products that Japan cannot manufacture itself and to import the best from abroad. The mass importation of foreign CEOs will encounter significant friction in many companies and is in fact not needed. The mass import of foreign CFOs, though, will simultaneously fly under the social radar while igniting an unmissable homing beacon for investors.
leo.lewis@ft.com
