January 29, 2020
The Ministry of Economy, Trade and Industry (METI) hereby announces that it will inaugurate a new body, called the “Business Restructuring Study Group,” aiming to hold discussions on specific measures for establishing a framework for effective governance and to compile the discussion results into practical guidelines, with the goal of encouraging Japanese companies to undertake necessary business restructuring including spin-offs and other approaches.
Due to the dramatic changes in industrial structures being brought about by the fourth industrial revolution, companies need to address the changes and improve productivity by creating innovation-driven value-added, while simultaneously maintaining competitiveness in global markets. To this end, focused investment of business resources into fortifying core businesses or future growth businesses is necessary.
As significant efforts to undertake such growth investment, companies should improve the metabolism of their business portfolios, in particular they should divest non-core businesses* by selling such businesses or by conducting spin-offs**. In Japan, some companies have been actively tackling such challenges, but on average, action in this direction has been insufficient, for large companies in particular.
Conventionally, government measures encouraging business restructuring have mainly focused on measures supporting them in facilitating M&A and other similar efforts, as seen in tax breaks and special arrangements regarding the Companies Act. However, some point out that regarding the divestitures in particular, organizational inertia associated with Japanese management’ mindsets, employment practices and other factors, all tend to be obstacles to the divestitures, and that the measures taken so far are not necessarily sufficient to motivate companies to decide on and carry out the divestitures.
In addition, corporate governance reforms in Japan, as part of the Growth Strategy policy, have emphasized proactive governance as an approach that is meant to encourage bold decision-making on the part of companies, including the business restructuring discussed here. However, it has been pointed out that although both the introduction of outside directors and engagement with shareholders have increased, a significant number of companies have failed to advance beyond discussing formalities concerning the governance reforms.
Based on an awareness of this problem, in December 2019, the Future Investment Council compiled an Interim Report on the Formulation of the New Plan to Advance Economic and Fiscal Revitalization***, which includes the goal that “Japan should compile guidelines concerning ideal approaches to enhancing the supervisory role of boards of directors” as an effort for “developing an environment for facilitating large companies’ business restructuring, including spin-offs”, as part of the policy for “encouraging such companies to invest in new fields.”
In light of these actions, METI decided to inaugurate a new body, called the “Business Restructuring Study Group,” aiming to hold discussions on best practices and specific measures for establishing a framework in which companies are able to exercise effective governance through three layers of company stakeholders, namely management, a board of directors (in particular, outside directors), and investors, and to compile the discussion results into practical guidelines.
*1. The term “non-core businesses” refers to business units run by a company or its group companies, whose potential for growth is relatively low since the businesses are involved in a field in which the companies lack sufficient competitive advantage to justify investment of sufficient resources to gain such an advantage. The businesses themselves are not necessarily low growth or unprofitable businesses.
**2. The term “spin-off” refers to making an existing subsidiary company or an individual business units within a parent company wholly independent through a divestiture, which provides the shares of the existing subsidiary company, or the shares of the new subsidiary company which has succeeded from the parent company for the shareholders of the parent company in proportion to the number of their shares of the parent company.
- ***3. Interim Report on Formulation of the New Plan to Advance Economic and Fiscal Revitalization (compiled by the Future Investment Council on December 19, 2019)
2. Study group’s initiatives
The study group will identify circumstances and factors that may cause Japanese companies to face difficulties in improving the metabolism of their business portfolios, in particular in advancing smooth divestitures of non-core businesses, and based on this, it will hold discussions on ideal approaches to: providing appropriate incentives to corporate executives, implementing the supervisory roles of boards of directors, engaging with investors, establishing a system for business assessment and disclosing the results thereof, and other initiatives. It will then present best practices of leading companies that are actively engaged in business restructuring.
3. Future schedule
The study group will hold its first meeting as below:
Date: January 31 (Fri.), 2020; from 13:30 to 15:30
Please note that the meetings will not be open to the public, but a summary of the minutes of the meetings will be made public on the METI website at a later date.
1. The second meeting will be held on February 14 (Fri.), 2020, from 14:00 to 16:00. From the third meeting onward, they will be held once or twice a month. The results of the meetings will be compiled into a report, including practical guidelines, by around the end of May 2020. Based on the report, METI will formulate and release the practical guidelines under its name by around the end of June 2020.
2. Based on the result of subsequent discussions, the title of the study group was officially re-named "Business Transformations Study Group." Therefore, "business restructuring " described in this press release shall be replaced with "business transformations."
4. List of study group members
Division in Charge
Corporate System Division, Economic and Industrial Policy Bureau