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Yen Masters

A new wave of CFOs is bringing badly needed financial discipline to corporate Japan.

In Japan, where courtesy still rules supreme over substance, a growing number of business leaders are starting to get downright rude. Frustrated by 10 straight years of declining shareholder values, these leaders are doing the previously unthinkable–writing off billions of dollars in worthless assets, selling off whole divisions, breaking off business relationships that date back to the postwar era, firing employees, and reorganizing the way they run their businesses.

And despite the growing mistrust of U.S. accounting practices in the wake of Enron, Japanese business leaders are looking to this country for inspiration, particularly in two respects that cut to the heart of Japan’s economic malaise: corporate governance and financial management.

“Every company in Japan wants to know what will make them a global competitor,” says Shuichi Komori, head of global finance at Japanese securities giant Daiwa Securities Group Inc. With 11 years of experience running Daiwa’s business in the United States, Komori thinks the answer lies in a precept of American-style management: “The key is that every board member must consider his top responsibility is the shareholder.”

This kind of talk still borders on heresy in Japan, where companies have ruthlessly focused on the top line, not the bottom. The reason for this orientation, says Komori, is that the Japanese board of directors and its executives are typically undivided. Traditionally, directors come from inside the company or from related companies, and therefore have a vested interest in maintaining the status quo.

Not any more–at least at companies like Daiwa, which scrapped its board three years ago in favor of a smaller, so-called executive-style board, with outside directors. What’s more, in another nod to U.S. management practice, some Japanese companies have created a new executive position: the CFO.

Most companies in Japan don’t have a head of finance. Sony Corp., long considered a maverick in Japan, revamped its board and hired its first CFO only three years ago. Last March, computer giant Fujitsu Ltd., with fiscal 2001 revenues of $37.6 billion (¥ 5 trillion), announced a complete makeover of its board and the hiring of its first CFO, Takashi Takaya. Meanwhile, at Daiwa Securities, Japan’s second-largest securities firm with revenues of $3.7 billion, Shuichi Komori became the first-ever head of global finance in 2001.

Why are Japanese companies starting to hire CFOs now? Two forces in particular are at work. First, a series of incremental changes in Japanese corporate law have made it tougher for Japanese companies to fudge their figures. Coupled with the global downturn and razor-sharp competition in overseas markets, profits have nose-dived, sending companies across Japan into crisis mode. For example, capital spending as a percentage of cash flow is expected to slip to 63 percent at manufacturers this year, its lowest level since 1981.

Second, Japan’s ailing banks simply can’t afford to carry their customers through today’s fires, whether they are members of the same keiretsu (corporate group) or not. These forces are starting to take a toll; the number of failed companies in Japan in the first three months of 2002 hit the third-highest quarterly level since World War II. Electronics companies alone wrote off more than $15 billion from their balance sheets this past spring.

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