Join us in reading this book, The Only Way to Survive for Japan, subtitled "Corporate governance is sure to save our country." Although this book mainly focuses on corporate governance, it broadly covers outside contributors and 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'
Read the fourth installment of Chapter 1:
The Financing Scandals of Suruga Bank Ltd
In connection with loans for shared houses, Suruga Bank Ltd is being questioned as to whether it would cook the documents for the approval of the loans. It is suspected that not only the sellers but also the bank itself was involved in tampering with the documents.
Suruga Bank Ltd initially explained that it had no bearing on the misconduct. But later a questionnaire-type survey was conducted targeting the bank’s employees who had been involved in financing the purchases of the shared houses, and the results of the survey revealed that they had continued to lend money to the owners of the shared houses after becoming aware of the falsification. Furthermore, a crisis management committee composed of corporate lawyers released the results of its research that a great number of the bank’s employees were conscious of the chances of falsification.
But the research by the corporate lawyers may not have been objective. Taking this into consideration, the bank has set up a third-party committee with outside lawyers. It is supposed to conduct exhaustive research trying to dig how far the bank’s employees were aware of and involved in the misconduct, thereby fulfilling the accountability to the stakeholders.
Skip the Accounting Gimmicks
What is the underlying cause? The research by the crisis management committee disclosed that in an attempt to maintain its increasing sales and profits, the bank had brought pressure to bear on the investigation division on loans for lenient inspection. The bank must have had a problem of a similar nature to Toshiba’s accounting gimmicks which were invited by an ambition to achieve an elusive goal as well as to the data falsification scandal of Kobe Steel, Ltd.
What should be questioned now is what the outside directors and company auditors were doing at that time and what they are doing now.
The media has not sufficiently unveiled such matters. There are three independent outside directors and three outside company auditors in Suruga Bank. It is excellent in terms of the formalities, but the question arises as to how they are functioning. I would like to expect the third-party committee to delve into this point in its investigation. It would be impossible to develop any preventive measures without focusing on and clarifying this point.
(The Asahi Shimbun dated June 2018)
Objectivity and Transparency of Board Succession Planning
On the 28th of September, 2018, the Ministry of Economy, Trade and Industry made amendments to the CGS Guidelines regarding the corporate governance system.
What is worthy of note is that it has made sweeping revisions to the provisions regarding the appointment of presidents/CEOs and succession planning. In June, 2018, the Tokyo Stock Exchange and the Financial Services Agency made amendments to the provisions of the Corporate Governance Code regarding the supervision over the board’s succession planning in respect of presidents/CEOs and the service of voluntary nominating committees. The amendments require the objectivity and transparency of succession planning for the appointment of a proper successor as helpful means to realize practical and workable corporate governance.
It is entirely up to the top executive whether the company’s business operation is successful or not. Despite this hard fact, conventionally, the presidents/CEOs of many Japanese companies would practically appoint their successors on their own, and such exclusive and opaque practice of selecting successors has triggered complaints from investors.
Helped by the Revised Guidelines
The revised Guidelines demand that the voluntary nominating committee be involved in the succession planning from an earlier stage, that important matters regarding the development and implementation of the succession planning be documented and that the contents of the succession planning be shared with the voluntary nominating committee; however, disclosure of the documents is not demanded.
The purpose is that if the objectivity and transparency of succession planning are improved there will be more chances to elicit trust from investors. But the question is whether it is possible for the nominating committees of a present nature and state to help make a reasonable selection of successors for the creation of long-term corporate value. What matters is to focus on what should be done for succession planning from now and how it will contribute to the increase in corporate value over the mid- to long-term.
(The Asahi Shimbun dated October 2018)
Nissan’s Governance
On the 19th of November, 2018, Mr Carlos Ghosn, who was chairman of Renault, Nissan Motor Company, Ltd and Mitsubishi Motors Corporation, was arrested on suspicion of violating the Financial Instruments and Exchange Act. According to the Tokyo District Public Prosecutors Office, Mr Ghosn is alleged to have falsely underreported the aggregate amount of his compensation at about ¥4.987 billion (about $34 million USD) in the securities reports for the fiscal years from 2010 to 2014, when in fact he had actually received about ¥9.998 billion (about $68 million).
Furthermore, Mr Ghosn is said to have had the authority to determine the amount of compensation for each individual officer of the company within the range of the aggregate amount of executive compensation fixed by the resolution at the general shareholders meeting. He is alleged to have set his own annual compensation at about ¥2 billion ($13.6 million), of which about ¥1 billion ($6.8 million) was arranged to be put aside for him to receive after his retirement. But it is claimed that he had not disclosed this contrivance in the securities reports.
But how did such circumstances come about?
He Said, She Said...
President Hiroto Saikawa of Nissan said,
Mr Ghosn had reigned supreme over the company as a tycoon for a long time, which must have adversely affected the management. [...] Due to this concentration of power, our organization had structurally been distorted over the years, which has made it difficult to detect and uncover any wrongdoing.
Thus, he ascribed this incident to Mr Ghosn’s autocratic management structure. If it is true, an unspoken rule of some kind might have existed in which no other officer could honestly confront Mr Ghosn, a charismatic top executive, who had greatly contributed to bringing Nissan back to life.
Such circumstances definitely require independent outside directors of substance to cut the mustard.
If the concentration of power is the root cause of Nissan’s trouble, it is inevitable to employ the required number of truly independent outside directors who should function so properly as to stop the top executive from getting everything his/her own way, thereby supervising the top management including the top executive. It goes without saying that the existence of company auditors carries significant weight, too.
Although the truth behind the incident has not necessarily been made clear, it is urgent for Nissan to build up a governance structure revolving around independent outside directors to make its resurgence happen.
(The Asahi Shimbun dated December 2018)
Regulation of the Process to Re-determine the Compensation Paid to Directors
Introduction of regulation of granting representative directors the sole discretion to redetermine the compensation paid to each individual director, which has already been determined by the board, has been shelved.
In the interim plan of the revisions in the Companies Act, it was proposed that the practice of giving the representative director of a public company the sole discretion to redetermine the compensation paid to each individual director requires a resolution at the general shareholders meeting. But in the outline of the revisions released in February 2019, it was provided that the compensation paid to directors be determined at a board meeting and the resolution be disclosed after that. The assumption is that the compensation of each individual director should be set at the board meeting. It is said that the change to the plan reflects opposition from the business community.
The problem is not one of simplicity at all. If you think the American way works well, do you agree with that enormous compensation?
Avoiding One-Man Compensation Decisions
Taking the case of Mr Ghosn, former chairman of Nissan, as an example, the company’s rule provided that the amount of compensation of each individual director be set under deliberation between the chairman of the board and the representative director, and Mr Ghosn would chair the board. There is no regulation of giving the representative director the sole discretion to redetermine the amount of compensation paid to each individual director, which partly contributed to the occurrence of Nissan’s incident.
Efforts are being deepened toward reforms to seek transparency in the process behind the determination of the compensation paid to directors. The Corporate Governance Code, which was revised in 2018, requires that objectivity and transparency be secured in the process of determining compensation. The special committee for improving governance established by Nissan suggested that a compensation committee be set up with three to five members who are all outside directors.
In the future, giving the representative director the sole discretion to redetermine the compensation paid to the directors will be subject to critical scrutiny by the shareholders. In order to obtain the understanding of shareholders, it is necessary that transparency be secured in the process of determining the compensation paid to each individual director.
But what matters above all is how to seek the practicability of outside directors. How can we secure such outside directors who are capable of responding to severe demands from shareholders and implementing them? With this issue left unresolved, there is a high likelihood that outside directors will be employed merely to comply with formalities.
(The Asahi Shimbun dated April 2019)
'Quantity' and 'Quality' of Outside Directors
Many companies hold their general shareholders meetings in June. As a matter of course, outside directors are selected at the general shareholders meeting.
Sumitomo Mitsui Trust Asset Management Company, Ltd and Pictet Asset Management (Japan) Ltd, both of which are institutional investors, announced that they would vote against them in the event that less than one-third of the directors are independent. It has made the news. But it seems that the discussion revolving around outside directors is beginning to focus on the "quality" not the "quantity."
What "quality" should be demanded from outside directors?
There is an argument that outside directors should attend board meetings more frequently. Asset Management One Co, Ltd is basically against the election of any outside director who has failed to record a minimum of 85% attendance at the board meetings.
It goes without saying that their attendance at board meetings is crucial. But there is more to being an outside director than just counting how ma ny times he/she attended the board meeting. Being independent of the company, outside directors are expected to provide advice and monitor functions that are based on their objective point of view and that are highly useful to the management of the company. What matters is not their attendance record but whether their opinions and advice are proper and useful for their company.
Focus on Practicality and Results
Actually, there was a company that explained that, despite their low attendance records, their opinions had been duly reflected in its board meetings, when it was asked about the attendance records of the candidates for outside directors, which remained at 70%.
"The Practical Guidelines for Corporate Governance Systems" established by the Ministry of Economy, Trade and Industry, propose that companies secure a line of directors who are varied in their knowledge and expertise. This diversified nature of the board is vital as a condition for furthering multilateral consideration and discussion. And what is more, it is inevitable that outside directors be given sufficient information, only by which they are able to express appropriate and useful opinions. Nobody can form proper opinions without access to necessary and profound information.
In order to attain proper functioning of the board, discussion should be focused on how to provide the right information to outside directors in a timely manner. An office of the board of directors should be paid attention to for the importance of its role.
(The Asahi Shimbun dated July 2019)
Follow the book from Chapter 1, as it is published.
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- The Only Way to Survive for Japan: Preface
- Book Review | 'Minority Shareholders' by Shin Ushijima
- The Only Way to Survive for Japan: Table of Contents
Author: Shin Ushijima
