J-SOX: The Good, The Bad, and the
(Not So) Ugly
The Financial Instruments and Exchange Law is Japan's version of the Sarbanes-Oxley Act, or SOX, hence its informal name of J-SOX. Scheduled to go into effect for Japan's 3,800 listed companies and their foreign subsidiaries in April 2008, J-SOX is being adopted by many firms right now. SOX was adopted following the Enron scandals that rocked the US business world, and J-SOX is being instituted in the wake of corporate misconduct as exemplified by Livedoor and Seibu Railway.

SOX has elicited a chorus of complaints from US businesses who argue it puts them at a disadvantage in world capital markets and has driven listings of public companies overseas. Japan's regulators have sought to avoid the missteps of SOX by implementing a less onerous regime based on broad principles that leaves much of the actual procedures up to company managers.

This has led to the usual debate and trade-offs between the "rules regime" of the US and the "principles environment" of most other places. Putting specific rules in place leads to an outcry about their inapplicability to specific firms and their high expense, but people know what they're supposed to be doing. Providing just general principles will elicit fewer complaints from Japanese companies, but also a lot of confusion about just what they should do to comply.

Among the worries Japanese managers have is finding the personnel to do the work. Japan has only about 17,000 CPAs, a small fraction of the number in the US, and importing Japanese-speaking accountants from abroad does not seem a realistic possibility. Audit automation will thus be critical to the process.

Not surprisingly, many Japanese business people don't even know what J-SOX is. In an online survey taken in April, some 46% of respondents had never heard seen or heard of the "SOX Law." One problem the authorities face in gaining broader recognition is that, like many new words and acronyms written in katakana or romaji, J-SOX means little to the ordinary Japanese.

Will J-SOX do much good? My view is colored by my experience as an accountant, but my prejudice is that rules that heighten the awareness of internal controls and their importance to both the audit and work processes are to be welcomed. Although initially met with complaint and resentment, they can be the catalyst for introducing operating improvements that benefit the long-term health of the firm.

In the Harvard Business Review (April 2006), two Deloitte executives contributed the article The Unexpected Benefits of Sarbanes-Oxley. The authors noted that the introduction of SOX, along with its drawbacks of higher expense, has had significant benefits, including standardizing work processes, reducing complexity, and minimizing the human error caused by manual processes.

Of course, it may be impossible to have spent the kind of money spent on SOX without experiencing some ancillary benefits, and there may have been far more efficient ways of bringing about these improvements. Moreover, there's no guarantee that any similarly benign effects will be seen in Japan.

Nevertheless, smart managers will look past the immediate costs and hassle of J-SOX and see it as an opportunity to review and overhaul their work processes and introduce new technology that both safeguards shareholder assets and improves company operations.

Steel Partners Is an "Abusive Acquirer"
Last week, the Tokyo High Court handed not only a defeat but a tongue lashing to US hedge fund Steel Partners. In upholding a lower court decision that would allow Bull-Dog Sauce Co. (2804) to issue stock warrants as a takeover defense, the Court labeled the American firm an "abusive acquirer" solely focused on making a short-term to medium-term profit. As described in this story from Nikkei Net (subscription required), the Court gave this explanation of why Steel's activities were wrong:

The high court...defined a stock company as a for-profit organization that makes distributions to shareholders by maximizing enterprise value. But "it cannot pursue profit on its own because profit is generated through economic activities with employees, consumers and others," explained the ruling.

Darrel Whitten has a nice roundup of recent events at his The Japan Investor. He notes that:

The high court ruling came as a shock to Steel and those hoping that activist investors would shake things up enough to accelerate Japanese management's slow and reluctant shift to shareholder capitalism. Heretofore, the perception was that the courts in Japan were protective of shareholder rights.

It's been interesting to talk to friends in Japan and read commentary on Steel in the Japanese press, like this piece from Business Media Makoto. The concept of the corporation as something more than the creature of shareholders -- ie, a true community of stakeholders comprising employers, suppliers, customers, etc. -- seems to resonate in Japanese society. Shareholders should not simply look out for their short-term gain but rather consider the long-term success of the firm, which may not be the course of action mandated by IRR and discounted cash flow calculations.

To what extent this concept is truly felt by the Japanese public, and how much is simply rationalizing a dislike for the external, foreign, unsettling forces Steel represents, is hard to say. In many ways, Japan remains extremely, even oddly, conservative, and the antipathy shown toward Steel's motives is more than just a manifestation of xenophobia. It will be interesting to see if other American funds, or even Steel itself, can repackage and rebrand itself so that what it is selling is more palatable to the nation's shareholders.

Fast Retailing Bids for Barney's

With all the talk (and it's still mostly talk) of foreign firms buying Japanese ones, it's useful to remember there are still Japanese companies taking over foreign firms.

Fast Retailing is a Japanese clothing store chain with over 780 shops. Its attempts at opening stores outside Japan have been less than successful, however -- only 30 of its units are overseas, and it's Uniqlo brand name is largely unrecognized outside Japan.

In 2006 it attempted to open a Uniqlo store in NY, but sales were disappointing. Last week, in another move to establish itself in the US, the Company bid $900 million for Barney's of New York, a 34-unit chain that is part of Jones Apparel Group. Barney's was already slated to be sold to Istithmar, a Dubai group, for $825 million.

Jones Apparel had already accepted Istithmar's offer, but the firm has until July 22 to consider other bids (although it would incur a breach of contract fee of around $21 million if it were to accept one).

The offer follows other purchases of overseas assets by Fast Retailing in the past few years:

First was the acquisition in February 2006 of the French lingerie brand Princesse Tam-Tam, then four months later Fast Retailing bought Comptoir Des Cotonniers, the chic French womenswear chain that has outlets sprinkled across London. These joined Theory, the clothing line known for its stylish jersey pieces, and the fashion label Helmut Lang, which Fast Retailing snapped up in 2003. It also owns an Italian tailor, Aspesi.

The Barney's purchase offers new avenues for the firm. According to Forbes:

Buying Barneys would provide Fast Retailing with a stepping stone for the low-priced retail chain to climb up to the high-fashion market. It would also provide it with a solidly performing brand name at a time when a number of other acquisitions it has made are struggling.

Nevertheless, whether this proliferation of brands makes sense is open to question. Motley Fool's Nathan Parmalee gives his opinion in a good article on the company:

I'm not a fan of retail companies that view themselves as a portfolio of brands. Gradual extensions of a brand can make sense, but when companies begin piling on brands, it rarely works out well. With every new brand added to the business, I wonder how Fast Retailing will focus and grow any of them meaningfully without materially increasing its cost structure.

Steel Won't Buy Tenryu Saw
Steel Partners has failed in its attempt to take over Tenryu Saw Manufacturing. Only 2.6% of shareholders agreed to sell their shares. As Bloomberg reports, the setback comes on the heels of Steel's failure to buy Bull-Dog and follows a long string of unsuccessful takeover attempts, including Yushiro Chemical Industry Co., noodle maker Myojo Foods Co. and brewer Sapporo Holdings Ltd.