Chapter 2.3 Finding Good Governance in Owner-Management Conflicts – JAPAN Forward

Corporate Governance and Sustainable Development: An Analysis of Owner-Management Conflicts

This report analyzes conflicts between corporate ownership and management through various case studies, examining their implications for sustainable corporate value and the United Nations Sustainable Development Goals (SDGs). The core issue is the tension between short-term national or personal interests and the long-term sustainable growth of corporations, a key tenet of effective governance.

State Intervention and its Impact on Sustainable Corporate Strategy

The Renault-Nissan Case: Prioritizing SDG 8

The relationship between Renault Group and the French government highlights a conflict between corporate governance and national policy aimed at achieving SDG 8 (Decent Work and Economic Growth). The government’s actions were primarily motivated by a desire to protect domestic employment.

• Legislative Measures: The implementation of the Florange Law, which grants double voting rights to long-term shareholders, was leveraged by the French government to increase its influence over Renault.
• Increased State Ownership: The government acquired additional shares for approximately €1.23 billion to secure its doubled voting rights, increasing its voting power to nearly 30% and ensuring its ability to influence corporate decisions regarding employment and manufacturing bases in France.
• Conflict with SDG 16 and SDG 17: This intervention created tension with Nissan, Renault’s alliance partner. Nissan executives expressed concern that increased government involvement could undermine the company’s governance (SDG 16: Peace, Justice, and Strong Institutions) and the equitable foundation of the international partnership (SDG 17: Partnerships for the Goals).

Internal Governance Conflicts and Shareholder Dialogue

Challenges in Aligning Management with Founding Families

Several Japanese corporations have experienced significant internal conflicts between management teams and founding families, impeding progress towards sustainable growth and responsible governance.

1. Ootoya Holdings Co, Ltd: A conflict arose over deviations from the founding family’s management style.
2. Cookpad Inc: The management team was reportedly overruled by the founding family.
3. Seven & i Holdings Co, Ltd: Disagreements led to the resignation of the chair.
4. Idemitsu Kosan Co, Ltd: A feud with the founding family surfaced regarding a planned merger with Showa Shell Sekiyu KK, with the family acquiring shares to block the deal.

The Role of Constructive Dialogue in Achieving SDG 16

Effective corporate governance, a cornerstone of SDG 16 (Strong Institutions), requires robust and constructive dialogue between management and all shareholders. The Corporate Governance Code mandates such engagement to ensure that corporate strategy aligns with shareholder interests, fostering mid- to long-term sustainable growth.

• The case of Idemitsu Kosan demonstrates a failure in this area, where insufficient dialogue with the founding family, a major shareholder, created a significant impediment to a strategic merger.
• This lack of engagement undermines the creation of accountable and transparent institutions, which are essential for sustainable industrial development (SDG 9).

Executive Compensation, Inequality, and Corporate Value

Performance-Based Compensation as a Tool for Sustainable Growth

Following its acquisition by Nissan, Mitsubishi Motors Corporation adopted a performance-based compensation system, tripling the aggregate limit for directors to ¥3 billion. This reform is intended to incentivize leadership to enhance long-term corporate value and attract global talent, aligning with principles of sustainable economic growth (SDG 8).

Addressing SDG 10: Reduced Inequalities

While performance-based pay can drive growth, it also raises concerns related to SDG 10 (Reduced Inequalities).

• Potential for Disparity: Critics argue that high executive compensation can create a large disparity between management and employees, potentially demotivating the workforce and undermining the collaborative culture necessary for sustainable success.
• Shareholder Scrutiny: At Renault, shareholders voted against the CEO’s €7.25 million compensation package, leading to a 20% reduction in its performance-based component. Similarly, Nissan faced criticism for high executive pay compared to industry peers.
• Link to Corporate Value: The report questions the direct correlation between higher director compensation and increased corporate value, noting that the long-term impact on sustainable performance remains to be seen.

Geopolitical Influences on Corporate Responsibility and National Strategy

The Impact of US Policy on Global Corporations and SDG 8

Actions by the US government under President Donald Trump demonstrated how national policy can directly influence corporate strategy and global supply chains.

• President Trump publicly criticized Toyota Motor Corporation’s plan to build a factory in Mexico, demanding the company invest in the United States to support domestic job creation.
• In response, Toyota announced a $10 billion investment in the US, aligning its corporate strategy with the US administration’s “Buy American and Hire American” policy, a nationalistic interpretation of SDG 8.

Implications for SDG 16: Peace, Justice, and Strong Institutions

The influence of US policy extended beyond economic matters, impacting international relations and institutional stability, which are central to SDG 16.

• President Trump’s suggestions to withdraw US armed forces unless Japan shouldered the full financial burden challenged the foundation of the postwar US-Japan security alliance.
• This pressure forces Japan to re-evaluate its national security strategy and its reliance on international partnerships (SDG 17), potentially leading to a fundamental shift in its approach to maintaining peace and stability.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

1. SDG 8: Decent Work and Economic Growth
   • The article extensively discusses corporate governance as a driver for “improving corporate value” and achieving “mid- to long-term sustainable growth.” It also highlights the direct link between corporate decisions and employment, as seen in the French government’s intervention in Renault to “protect domestic employment” and President Trump’s “Hire American” policy, which pressured Toyota to create jobs in the US.
2. SDG 10: Reduced Inequalities
   • The article directly addresses inequality within corporations by examining executive compensation. It raises concerns that high performance-based pay for directors could “cause a large disparity in the amount of compensation between the management and the employees,” potentially harming employee morale and widening the income gap within a company.
3. SDG 16: Peace, Justice and Strong Institutions
   • The core theme of the article is corporate governance, which relates to building effective, accountable, and transparent institutions. It emphasizes the importance of the “Corporate Governance Code,” which encourages “constructive dialogue with shareholders” and holds management accountable. The conflicts between management and shareholders (e.g., at Renault and Idemitsu Kosan) illustrate the challenges and importance of strong governance mechanisms.
4. SDG 17: Partnerships for the Goals
   • The article touches upon global partnerships and policy coherence through its discussion of international business alliances (Renault-Nissan-Mitsubishi), foreign government intervention, and trade policies. President Trump’s criticism of Toyota’s investment in Mexico and his threat of a “large amount of border tax” exemplify how national policies can impact international trade, investment, and global economic stability.

2. What specific targets under those SDGs can be identified based on the article’s content?

1. Under SDG 8: Decent Work and Economic Growth
   • Target 8.5: “By 2030, achieve full and productive employment and decent work for all women and men…” This target is relevant as the article shows governments actively intervening to influence corporate decisions for employment purposes. The French government’s primary motive in Renault is to “protect domestic employment,” and President Trump’s policy aims to “expand employment in the United States.”
2. Under SDG 10: Reduced Inequalities
   • Target 10.4: “Adopt policies, especially fiscal, wage and social protection policies, and progressively achieve greater equality.” The debate over performance-based compensation for directors is a direct example of a wage policy. The article questions whether such policies, which create a “large disparity” between executive and employee pay, are sustainable or beneficial, linking directly to the goal of achieving greater equality.
3. Under SDG 16: Peace, Justice and Strong Institutions
   • Target 16.6: “Develop effective, accountable and transparent institutions at all levels.” The article’s focus on the “Corporate Governance Code” and the need for “constructive dialogue with shareholders” points directly to this target. The examples of shareholder votes at Renault and conflicts at Idemitsu Kosan highlight the struggle to make corporate management more accountable and transparent to its stakeholders.
4. Under SDG 17: Partnerships for the Goals
   • Target 17.13: “Enhance global macroeconomic stability, including through policy coordination and policy coherence.” President Trump’s actions, such as threatening a “border tax” on Toyota, represent a challenge to policy coherence and global economic stability. His “Buy American and Hire American” stance is presented as a policy that could lead to a “shrinking international economy and conflicts with other nations,” undermining stable global partnerships.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

1. Indicators for SDG 8 (Target 8.5)
   • Number of jobs created or protected: The article provides a specific figure for job creation when it states that Toyota announced it will “newly employ about 400 people” in the United States. The French government’s goal to “protect domestic employment” implies that the number of jobs retained is a key performance indicator for their policy.
2. Indicators for SDG 10 (Target 10.4)
   • Executive compensation figures and ratios: The article provides concrete data points that can be used to measure income disparity. It mentions the compensation for Carlos Ghosn (“about €7.25 million” from Renault and “¥1.710 billion” from Nissan) and the proposed compensation limit at Mitsubishi Motors (“¥3 billion”). These figures serve as direct indicators of the scale of executive pay, which can be compared to average employee wages to measure inequality.
3. Indicators for SDG 16 (Target 16.6)
   • Shareholder voting results: The article mentions a specific metric for corporate accountability: “in the general shareholders meeting of the company held in April 2016, 54% of the shareholders had voted against the resolution for Mr Ghosn’s compensation.” This percentage is a direct indicator of shareholder engagement and the effectiveness of governance mechanisms in holding management accountable.
4. Indicators for SDG 17 (Target 17.13)
   • Foreign direct investment and trade policy measures: The article implies indicators related to global economic policy. Toyota’s plan to “invest $10 billion in the United States” is a measure of foreign direct investment influenced by national policy. The threat of a “large amount of border tax” is an indicator of protectionist trade policies that can affect international economic stability.

4. Table of SDGs, Targets, and Indicators

Source: japan-forward.com