Join us in reading this book, The Only Way to Survive for Japan, Corporate governance is sure to save our country." Although this book mainly focuses on corporate governance, it broadly covers governance as a whole. Peppered with real-life examples of successes and failures, the book is also a primer on the rules and cautions of corporate governance in Japan.
Find all published chapters at 'The Only Way to Survive for Japan'
Join us for the first part of Chapter 1.
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Outside Directors or Audit & Supervisory Board Members
The scandal that Mizuho Bank, Ltd. had offered loans to an antisocial force was resolved when Mizuho Financial Group, Inc, a holding company, gave way to a company with committees as a preventive measure. In a company with committees, three committees have to be set up, namely, a nominating committee, an audit committee and a compensation committee, each of which should have outside directors constituting its majority.
The proposed amendment to the Companies Act, which was endorsed by the Cabinet in November 2013, highlighted the introduction of outside directors. Probably because of this decision, Canon Inc. has decided to have two outside directors.
But corporate scandals occur even in companies that have outside directors. Does this mean that we have to follow the American-style system, in which outside directors are to constitute the majority of the board members? No, even with such a system, the United States had failed to prevent the Enron scandal from occurring.
So, what is the problem?
Upgrading the Function of Management
The problem lies in the reality that outsiders have no way to probe into what is really going on in a gigantic company. Even top executives remain out of touch with the whole picture. Whether independent or not, outside directors have no access to the inner workings of the company. A board of directors meeting is held only once a month. How can outside directors collect sufficient information for the execution of their duties?
An audit corporation exists for this reason and purpose. And audit corporations are subject to the supervision of the Financial Services Agency.
One more thing: audit and supervisory board members are also dependable. Full-time audit and supervisory board members and outside audit and supervisory board members regularly hold a small meeting called an audit and supervisory board meeting. What is good about this is that outside audit and supervisory board members can take advantage of this opportunity to inquire about and obtain internal company information.
If you quizzically suspect that audit and supervisory board members are of any use, you are blind to the real situation. Audit and supervisory board members have their own investigation authority. The same is true of an audit committee set up in a company with committees. What matters is not the system but how it functions.
Mizuho Financial Group, Inc is reportedly going to newly establish a meeting of the board of outside directors. The board is also chaired by an outside director. The success of Mizuho’s attempt wholly depends on the audit committee, which is going to take over the business of the audit and supervisory board members, as well as on the audit corporation and the Financial Services Agency. If another scandal happens, it would again translate to a serious occurrence for the entire nation.
(The Asahi Shimbun dated February 2014)
Clarify the Position of Executive Officer
Which is higher in rank, "執行役員常務" (literally, Managing Executive Officer) or “取締役常務” (literally, Executive Managing Director)?
There are some companies that use "取締役執行役員常務" (literally, Director, Managing Executive Officer) instead of "取締役常務." In such companies, the president is called "代表取締役執行役員社長" (literally, Representative Director, Chief Executive Officer). I wonder what "執行役員" (literally Executive Officer) means.
There is one thing that is clear: the executive officer does not necessarily need to be a director nor "執行役" (literally Operating Officer). They are called officers, but actually, they are employees. In the first place, there is no provision regarding them in the Companies Act.
The operating officer, who is to be established in a company with committees, is a title stipulated in the Companies Act. The operating officer is not necessarily a director, either, but elected by a resolution at a board meeting and is responsible for the execution of the company’s business. But companies with committees only comprise a small part of the listed companies. Therefore, there are fewer chances of encountering a person with the title of operating officer than executive officer.
Understanding the Executive Officer
It may well be that the definition of executive officer is puzzling. It was originally created to decrease the number of directors. Previously, there was a controversy over the issue that Japan’s listed companies had more directors than they should, and in response to this, some companies decided to shift some of their directors to executive officers, just for the sake of convenience. It was Sony Corporation that first adopted this naming system. It was seventeen years ago (1998) before the introduction of companies with committees.
There was also a hidden agenda behind the birth of this title. Executive officers are exempt from shareholder derivative suits. Taking advantage of this convenience, many companies have started to adopt this position. And now the current situation is as stated in the opening.
The Liberal Democratic Party suggested in its "Japan Revival Vision" that the status of executive officer be clarified. It may well be so because it is a vital post. Shareholder derivative suits have been widely practiced. Now is a good time to debate whether or not an executive officer should be embroiled in shareholder derivative suits.
(The Asahi Shimbun dated June 2014)
Concerns About a Trend to Employ Outside Directors Just to Make Up the Number
The Financial Services Agency and other relevant agencies have been developing guidelines for corporate governance. In "the proposition (excluding the introduction) regarding the fundamental ideas of the Corporate Governance Code," it was proposed that listed companies choose at least two outside directors who have profound qualities and resources.
Furthermore, in the Companies Act, which was amended in June, it was decided that any listed company that has no outside director should explain at its ordinary shareholders meeting "the reason why it is not appropriate to have an outside director." They may find it difficult to explain the reason, so the election of outside directors is practically regarded as compulsory. The proposition has developed this decision a step further and made the number of outside directors two or more.
But that is easier said than done.
Training for Officers
Out of about 1,800 companies listed in the First Section of the Tokyo Stock Exchange, those companies that have two or more outside directors represent a small portion. If the other companies were expected to follow suit and decide to have two or more outside directors, it is said that another 2,100 candidates would be additionally needed, but only for those companies listed in the First Section of the Tokyo Stock Exchange.
It is not sufficient to appoint two or more outside directors just for the sake of formality. Outside directors are obligated not only to supervise the management as board members but also to properly exercise their voting rights on their own. It follows that outside directors should be duly qualified so that they can properly perform their roles and responsibilities.
But I wonder if it is easy to find someone who is fit for the post of outside director. If they have their primary job, it is difficult for them to fully devote themselves to the duties of an outside director. Does the president continue to appoint outside directors at all?
Whatever it may be, it stands to reason that necessary training should be promptly provided for newly appointed outside directors. The proposition also suggests the necessity of training for officers.
Just empty rulemaking will get us nowhere unless the necessary number of duly qualified outside directors is secured. There are lots of things to be done with haste.
(The Asahi Shimbun dated December 2014)
Establish the Ideal Corporate Governance System
The public comment regarding the new listing requirements of the Tokyo Stock Exchange has ended. In order to play out the original proposition of the Corporate Governance Code, the Tokyo Stock Exchange had been working on this with great haste for the last eight months, starting from August of 2014.
From June 1st, listed companies will be urged to "comply or explain" (implement the Code or explain the reason if otherwise).
It is the decision of each company whether or not to implement the Code. However, if a company fails to explain why it declines to implement the Code, the name of the company will be disclosed as a punishment. In the case of failure to implement the Code, an explanation of the reason is compulsory. How far should they go into the details about the explanation of the reason? No concrete standard for the description of the explanation has been provided yet. Therefore, suspicion arises as to whether the Tokyo Stock Exchange actually wants to make the companies comply.
Whatever it may be, listed companies are compelled to seriously consider what governance system they should construct.
Improving Governance
In fact, the year 2015 saw an increasing number of companies that were working on improving their governance.
The most impressive case is Fanuc Corporation. The company had previously been notorious for not being forthcoming with information. But, surprisingly enough, the president himself announced that he would place emphasis on talks with the company’s shareholders and newly established a division to promote talks with the shareholders. It was the Corporate Governance Code under Abenomics that encouraged him to cross the threshold to the other side.
I hope that the ideal governance system will be chosen through deep and profound consideration of what the most appropriate governance system is. In such a case where explanation is required, companies should bring themselves to make due explanation honestly and resolutely. Without such an attitude, it is impossible for them to "earn" in the global market. Only companies full of animal spirits can make money in the world of capitalism. They should not be satisfied with the mere implementation of the Code. They should manage their companies in such a way that the Code can function effectively for them.
(The Asahi Shimbun dated April 2015)
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Follow the book from Chapter 1, as it is published.
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Author: Shin Ushijima
