Masamoto Yashiro, chairman of the Board of Shinsei Bank, kicked off the Morgan Stanley Asia Pacific Summit in Singapore yesterday (November 15) as the keynote luncheon speaker.
Yashiro was at the forefront of Shinsei Bank's turnaround, which, you may recall, was previously called the Long-Term Credit Bank of Japan, and was nationalised in October 1998. In March, 2000, a consortium of foreign investors led by US private equity fund Ripplewood Holdings acquired LTCB, and the bank started afresh as a private commercial bank, changing its name to Shinsei Bank.
Yashiro became CEO in 2004, and then in June of 2005 was appointed chairman of the board - so he is uniquely positioned to comment on the transformation of the bank.
He took the opportunity at Morgan Stanley's summit to talk about corporate governance and how, in his opinion, Shinsei is getting it right. As he spoke, there was limited clanking of forks, coughing and no cell-phone disturbances, but rather surprisingly rapt attention to his words - kudos to Morgan Stanley for attracting such a polite, genuinely interested crowd.
In order to explain Shinsei's success, he started by outlining the Japanese banking failure, which he says dates back to the 1986 Plaza Accord when the yen exchange rate was abruptly revised upward to 180 yen from 240 yen and further strengthened in no time to 130 yen. This prompted the government to make a policy decision to make money available at very low interest rates, which dominoed into corporate "financial engineering" and in turn became the mail pillar of the bubble economy, says Yashiro.
When the bubble burst, he says that most people in politics, government and business felt that given time the market would eventually recover - and thus did not deal with the post-bubble problems expeditiously.
"Banks and their corporate borrowers had built-in conflicts so that banks did not pressure the clients to undertake thorough restructuring. The traditional and pervasive cross-shareholding relationship between banks and borrowers played a much more important role than rational business judgments in dealing with customer problems," he commented.
"Even when borrowers could not survive due to continuous losses from their core business and their balance sheets had nearly nil or negative net worth, banks in most cases did not want to disturb the traditional good relationships with the customers."
So fast-forward to today. The lessons learnt are numerous: be decisive and deal with risky borrowers, take dynamic views of loans, and remember that the bank's role is always subordinate to the role of the main players in the economy who are manufacturers and service industries," says Yashiro.
Finally, establish good corporate governance.
"It is my belief that the traditional Japanese management style will have to change," says Yashiro. "We must move towards greater transparency and must be willing to subject ourselves to rigorous scrutiny by shareholders."
Shinsei Bank is practicing what he is preaching.
He said that from the start of the new bank in March 2000, more than two-thirds of the board of directors have been non-executive directors. The bank board currently has 15 members, with two from management and 13 non-executive directors, and they include seven non-Japanese members.
(After his speech, during a more relaxed question and answer period about his IT set-up, he would say, "You have to have different nationalities. You have to hire Indians. I never ask what school they went to, whether they are a man or a woman, I only ask what can they do")
He knows that such a set-up begs criticism. For one, why run a company by committees? His answer: "Simply stated, I believe that if a company is owned by hundreds of thousands of shareholders, it should not be left completely to the wishes of several corporate managers. If you look at the recent failures of a dozen well-known Japanese corporations, you will see that these companies were invariably run by individuals who were regarded as charismatic 'leaders' of their companies."
Such a set-up, he argues, creates boards of "yes men" - so the independent board of directors is a way out of that blind stamp-of-approval mentality.
But another criticism one could levy of his viewpoint is that independent board of directors have not prevented irregularities at several American companies, which endured the likes of the Enron fiasco and has industries such as the airlines and car manufacturing undergoing a spate of bankruptcies or near bankruptcies because boards were unable to reign in runaway labour costs and pension plans.
"Of course, the system of non-executive or independent directorship is not a panacea for the corporate governance problems in either the US or Japan or elsewhere, but the issue is more importantly how well and faithfully these directors fulfil their obligations as truly independent directors," says Yashiro.
And, of course, he says that if you do not build a strong financial system, you do not have a product to build your business.
So what has Shinsei done?
First, he says he has paid close attention to IT, as it is not just having products - it is being able to deliver them.
Shinsei, he says, is unique, in that it shunned the more expensive IT options. The bank has no mainframe computer system but rather it built a new infrastructure system using Microsoft Windows as the work stations with off-the-shelf software selected mainly from Indian vendors such as I-flex, Wipro, Nucleus, Polaris and Tata Consulting Services.
"We built the basic IT system spending only 10% of what would have been required if we followed the conventional approach," he says.
And he says, the bank has passed along this cost-saving to retail customers, enabling it offer ATM and fund transfer services free of charge to its customers. More important, because the system is flexible, Shinsei Bank can introduce new products and services in a matter of a few months.
That has literally paid off. The fee and commission income for the bank, which accounted for only 15% of the total revenue in 2000 when it started afresh, has now reached 65% to 70%. The retail banking business, which was started in June 2001, now generates annual net income of $60 million to $70 million, accounting for 10% of the total net income growing at an annual rate of 35% to 40%.
That net income is now at about $650 million, from about $300 million in 2000. Perhaps the most important other positive signs: The non-performing loans, which accounted for about 30% of total loan assets in 2000, is now down to 1.5%.
And so, Yashiro was quite proud of the bank's successes, but he candidly admitted in a Q&A session that many of the rest of Japan's banks and corporates have work to do - that the nation was still in "the probation period." He noted that banks are depending too much on interest rate income and that companies need to create products and services that generate income.
Above all, executives need to learn how to analyze their business plans, which means knowing what is making or losing money. You laugh - indeed the audience laughed - when he provided examples of comptrollers who said they could not tell you if their company made money - or lost money - last month.
Yashiro, who was born in Tokyo in 1929, ended his formal comments, all spoken with a perma-smile on his face, with this final thought: "Having personally witnessed Japan's recovery from the war-devastated economy, its rise to a major economic power during the 1980s, its self-aggrandizement during the bubble period, I am hopeful that Japan will regain confidence in its future and will do everything we need to do to become a true partner with countries in Asia complementing each other's strength in the spirit of mutual trust and respect."