Chapter 4.4 Corporate Governance and Choosing the Right Outside Directors

Join us in reading Chapter 4 of the book, The Only Way to Survive for Japan, subtitled "Corporate governance is sure to save our country." This book focuses on corporate governance.

In Chapter 4.4, the author considers the difficulty in selecting outside directors who will fulfill their roles of improving governance and corporate value. Referring to his own experience, the author also considers the national responsibility of good governance. Then, once again using the case studies of the Toshiba scandal, he compares the real-life lessons, risks, and outcomes of other companies as well.

Find all published chapters at 'The Only Way to Survive for Japan'

Read Chapter 4.4, the 27th segment of the book:

My Opinion of the Toshiba Scandal

Looking at what happened to Toshiba and Mitsubishi Electric Corporation reaffirms the difficulty of choosing outside directors.

These companies may boast of outside directors who have brilliant backgrounds. However, I do not think that they have fulfilled their roles as outside directors should.

What is the cause?

I figure this is attributable to the corporate practice that presidents have the power to choose outside directors. Now Japan is gradually becoming familiar with the concept of a nominating committee. Nevertheless, there are still a number of companies out there that entrust the president with the selection of outside directors.

It would be possible to argue, "There is no problem with it," or "That would be so much the better." However, we are living in a society where outside directors are like the icing on the cake. More than thirty years ago, I heard an outside director say, "I cannot interfere in the business of a company which does not belong to me." The reality in those days, as represented by his statement, still remains partly unchanged even now.

But this attitude absolutely needs changing. Otherwise, Japan's "lost three decades" will surely extend into four decades. The expanding coronavirus pandemic makes me heave a sigh of hopelessness without knowing where to turn for salvation. I wonder how the people of Japan's future generations will see this country?

Responsible Governance Starts With the Nation

In this era when the United States is in conflict with China, what will Japan have to do? We should not just let people trumpet the specious but irresponsible phrase, "Japan can be a bridge between the two countries." Something of a serious nature, which is not in sight yet, is sure to occur in the future.

Of course, it is not a problem that economics can solve, but all in all, I expect corporate governance will save us because it is a matter involving environment, social, and governance, called ESGs.

Who can say that something like what happened at Kabul International Airport will never happen to us? If there is anyone who thinks it is excessive worry, give me a logical explanation so that I can shake the sense of dread.

(The Kihou Corporate Governance dated August 2021)

Outside Directors and the Prevention of Scandals

In November 2021, Toshiba disclosed the investigation report by its governance enhancement committee regarding the problems with the general shareholders meeting held in July 2020.

Toshiba employs a governance system called a company with a nominating committee, etc, which is expected to work excellently for promoting governance, but the head of the said committee stated, "It has a good shape, but seems to lack soul." The report insisted that the nominating committee choose candidates for directors with considerable insight and perception as one of the means to prevent the recurrence of scandals.

On the other hand, regarding Mizuho Financial Group, Inc, which has suffered system failures eight times in 2021 alone, three executive directors were due to resign and retire the following spring. Attention was being focused on the attitudes of the outside directors. As the Financial Services Agency determined that they had not sufficiently discussed the problems in the board meetings, it was predicted that all of them were likely to retire.

That would translate to a great leap forward in the history of corporate governance. I do not think that the outside directors were capable of preventing such system failures on their own. However, I would say that as a board, they could have been more actively devoted to monitoring the execution before such system failures had occurred eight times.

Outside Directors Can Prevent Problems

That said, what would the outsiders concretely have been able to do?

First of all, the question should be whether they had any aides who were ready to help them when they tried to obtain the necessary information. If the proper functioning of such a mechanism were questioned, it could have a significant influence on the aid system for outside directors of all listed companies. That is, what matters is what system a company should have that can, respectively, function under normal circumstances and contingent circumstances.

Outside directors are practically required to work full-time under contingent circumstances. Therefore, outside directors who lack the determination and readiness to grapple with such circumstances are deemed unfit as outside directors. Whether a person is objectively capable of dealing with contingent circumstances is one of the requirements for selection.

The key is the aid system.

(The Asahi Shimbun dated December 2021)

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