High-rise buildings in Tokyo (stock image)
A series of corporate scandals in Japan, including those at Chubu Electric Power and precision motor maker Nidec, has raised questions about whether outside directors are effectively fulfilling their role as independent overseers of management.
Outside directors are expected to provide an objective perspective and challenge executives when necessary. However, critics say many have become little more than a formality, lacking the information and support needed to properly oversee management.
In response, the Financial Services Agency and the Tokyo Stock Exchange this month revised Japan's Corporate Governance Code to emphasize, for the first time, the role of a board secretariat in supporting outside directors. The move is intended to strengthen the effectiveness of corporate boards.
The appointment of outside directors has expanded since Japan introduced its Corporate Governance Code in 2015. The Tokyo Stock Exchange currently requires companies listed on its Prime Market, its top-tier segment, to have at least one-third of their board members be independent outside directors.
However, despite these efforts, corporate governance reform in Japan has progressed slowly.
The Nidec Case
At Nidec, accounting irregularities and quality issues uncovered last year revealed that outside directors had failed to detect misconduct and that the board of directors had been unable to function effectively. Following the company's shareholders' meeting in June, most of its directors were replaced.
A third-party committee investigating Nidec's accounting problems said in its report that the company's outside directors had not been provided with the information necessary to properly carry out their responsibilities.
It also noted that simply expecting outside directors to oversee and evaluate management fairly placed an unreasonable burden on them.
For outside directors, it can be difficult to obtain enough information to make independent judgments at board meetings held only once a month. They may also hesitate to openly challenge a president with extensive knowledge of the company's business.
Independence Is Key
Shin Ushijima, founding partner of Ushijima & Partners and president of the Japan Corporate Governance Network, says outside directors often owe their appointments to company presidents, making it difficult for them to act independently.
"Individuals who do not have the approval of the president—who often wields overwhelming influence over personnel decisions—are unlikely to be appointed as outside directors," Ushijima explains.
"Outside directors receive generous compensation and hold significant authority, but under the current system they may be reluctant to challenge the president."
The revised Corporate Governance Code specifically states that companies should strengthen the functions of departments that support boards of directors.
The role will not be mandatory, but a Financial Services Agency official stressed its importance, saying, "This shows how important the secretariat function is. Companies have reached a stage where outside directors are judged by quality rather than quantity."
Corporate secretaries are expected to perform a wide range of tasks, including setting board agendas, managing schedules, and ensuring directors receive the information they need. By creating an environment in which outside directors can engage in meaningful discussions, they could help improve the effectiveness of corporate boards.
Ushijima says corporate secretaries should operate independently to ensure outside directors have access to the information they need: "This role cannot be filled by someone who is merely a subordinate of the president."
He argues the position should instead be filled by independent professionals, such as lawyers or certified public accountants, and that they should be appointed by the board of directors rather than by management.
Pressure for Reform
For Chubu Electric Power, which is facing scrutiny over falsified earthquake-resistance data related to its nuclear facilities, strengthening the role of outside directors has become an urgent priority.
At a press conference on July 29, Chubu Electric President Kingo Hayashi said, "For companies engaged in businesses with a high degree of public responsibility, such as electric utilities, corporate governance is the foundation of their operations," adding that the company is considering organizational reforms.
RELATED:
- Corporate Governance Reform Seen as Key to Reviving Japanese Companies
- Chasing Nidec: Third-Party Probe Finds Widespread Accounting Misconduct
(Read the interview in Japanese.)
Author: Atsushi Oda, The Sankei Shimbun
