
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 sixth part of Chapter 1:
The Selection of the President by Outside Directors
In October of 2020, Mitsubishi Chemical Holdings Corporation announced that Mr Jean-Marc Gilson would be elected the next President/CEO. For the purpose of implementing a large-scale reconstitution of its business operations, the company decided to appoint a top executive from overseas who is less shackled by its in-house institutions.
It is hoped that the company should change along with the change of its president. Panasonic Corporation has also experienced the change of the president in line with the reform of its business operations.
The growth of a company largely rests with its president. Especially, the large-scale reconstitution of its business operations would draw strong internal opposition. What is desired for the president is indefinitely sufficient courage and leadership to override it. He/She should be completely free of the old-style management or long-lived, in-house institutions.
Traditions to Bury
Japanese listed companies have a tradition in which the present president appoints the next succeeding president. Only the president knows who is most appropriate as his successor. It stands to reason. Except for certain cases, the next president is just an extension of the present president. It should constitute a chain of the traditional way of business operations.
Such tradition must partly be a logical explanation of the lost three decades. But we should never let the lost three decades extend into the lost four decades. One of the best solutions, I figure, would be to leave the selection of the president of a company in the hands of its nominating committee which is led by independent outside directors.
Good independent outside directors can impartially select the right person for the company, being free from any favoritism or influence by others. The selection of the top executive of Mitsubishi Chemical Holdings Corporation was led by the nominating committee mainly composed of outside directors, and the present president had no truck with any of them. The top executive of Panasonic was also selected by the nominating/compensation advisory committee mainly composed of independent outside directors.
I would like to suggest that the Japanese-style business management succession be abolished. We have stuck to that tradition for the past thirty years, yet it has been rated as a failure now. Possibly, we may have been too obsessed with the ghost of the exceptional success we had enjoyed in the past. Now, we have no other way but to gamble on the potentiality of a nominating committee composed of independent outside directors. We have no time to lose; a delay of a day could translate to the quicker and deeper sinking of Japan.
(The Asahi Shimbun dated January 2021)
A Startup and Outside Directors
A startup company is different from a venture business. Startups need to be committed to innovation and social contribution. The biggest goal is to create an environment where companies like GAFA (Google, Apple, Facebook/Meta and Amazon) are born in Japan.
Startups have been showing remarkable growth, and the need to finance startups is drastically increasing. Investments for startups should be made in an appropriate and effective manner. That said, however, there is a high probability of investors facing risks in investing in startups. It is not only with respect to the issue of whether startups will grow as investors expect, but investors are greatly concerned about the corporate governance of startups. Inevitably, startups must build a governance structure in an attempt to attract investment. It is especially important for them to secure outside directors who are highly knowledgeable about management strategies.
Then, immediately, they will face a shortage of suitable outside directors. Even the listed companies are frustrated by a shortage of outside directors. It may well be that startup companies find it difficult to secure outside directors necessary for their corporate governance.
Sustaining Startups
The success or failure of startups would determine the future of a nation. In order to sustain the ongoing growth of startups, outside directors should be made available to the startups as soon as possible. It is important that training systems for outside directors be constructed at the earliest date possible so as to respond to the demands from startups. We have to build such a scheme as to implement training and education specifically geared to outside directors.
There is a way to play it out easily: it is that directors and executive officers of listed companies serve as such outside directors for a certain period of time. But are those people in such positions at all willing to serve as outside directors of other companies? It all depends on the decisions of the listed companies. It would be the best opportunity to train themselves as candidates for the top executive in the future.
Japan is not allowed to be the only one to get a late start.
(The Asahi Shimbun dated February 2021)
Who Chooses the Successor to the Top Executive?
It is needless to say that selecting the successor to the top executive is a very important matter.
Then, who chooses the successor?
The present president thinks about it carefully and singles the successor out from some internal candidates responsibly based on his comprehensive judgment. It has been a long-standing practice in Japan. Even before the war, it was taken for granted that senior executives were employed for life. This practice is compatible with the institution of many companies that inside directors comprise the majority of the board of directors.
The person who once served as president of a corporate behemoth, with whom I had a talk, said that the successor to the president is chosen automatically (from inside) after evaluation over a long period of time and that the outside directors are entrusted to confirm in line with the company’s governance that it is not an arbitrary judgment by the present president.
This is the fundamental principle implemented by many traditional Japanese companies at the present time.
The Mitsubishi Chemical Holdings Case
Just recently, however, Mitsubishi Chemical Holdings Corporation saw its nominating committee mainly composed of outside directors determine the successor to the president. The chair of the nominating committee is Mr Takayuki Hashimoto, the former president of IBM Japan, Ltd and a director of the Japan Corporate Governance Network. Mitsubishi Chemical Holdings Corporation is a company with a nominating committee, and four of the five nominating committee members are outside directors. It is regarded as a committee boasting of a high level of independence. Upon due consideration of Japanese and foreign candidates, the committee selected one person, who happens to be a foreigner.
Both of the above companies seem to have their own reasons to take account of in their decisions to select the successors. It is hardly possible that every corporation has a monochromatic environment for its decision.
Changing Past Ways
The thing here is, Japan’s long-standing corporate practice that the present president chooses candidates for outside directors should be abrogated as soon as possible. The president is not always happy to do so, but he/she had no other choice at hand.
The problem we may face in the future is how we can secure independent outside directors.
The present outside directors should be entrusted to choose the candidates for succeeding outside directors. Concretely speaking, a nominating committee with a majority of outside directors should select the candidates for outside directors.
An office of the board of directors would be a big help to support such outside directors. The office explains the in-house information and circumstances to the outside directors and responds to their questions. Were it not for such arrangements and assistance, the nominating committee would not be able to give full rein to its strengths. Therefore, the mission of the office carries significant weight.
(The Kihou Corporate Governance dated March 2021)

A Quota System for Leaders
The ratio of female directors in companies listed on the First Section of the Tokyo Stock Exchange is way behind the international standard. It was 7.1 % in 2020, marking an increase of 1.4 points from 2019, but the gap is still desperately large.
There are a number of research results saying that companies with a higher ratio of female directors tend to achieve better business performance. A certain Western leading investment bank requests a Western company which desires to become a public company to select at least one female director.
I think it is high time that Japan adopted a quota system. Many Western countries including Norway have been promoting the introduction of a quota system which requires the appointment of female directors, thanks to which the ratio of female directors is increasing. Even in Germany where there used to be strong opposition against it, the quota system is likely to be introduced not only for statutory auditors but also for directors of some leading public companies.
Of course, there is a counterargument. They argue that directors should be chosen not by gender but by competence and that the introduction of a quota system just for the sake of formality would bear the risk of impeding the productivity of an organization. Thus far, however, no country which has adopted a quota system has experienced sluggishness in its economy.
Learn, Not Compromise
Then, why not compromise on it with a lower ratio? We should learn from what outside directors have actually accomplished and how they have contributed to their companies.
If female directors are collected just for the sake of making up the number, it would in no way contribute to the true diversification of the board. It is of the utmost importance to cultivate great talent in-house. But we cannot expect much independent and voluntary efforts on the part of each individual company. Hence, this quota system.
If women even in small numbers joined the management, the organizational fiber would accordingly change. Workplaces would be improved both for men and women, and the environment would be paved for women to realize their internal promotion, thus producing a virtuous cycle.
If we leave things as they are now and do nothing about it, we would be most likely to plunge into the lost four decades. A quota system could be a silver bullet for Japan, which is about to submerge on the world stage. Japan is absolutely not a country only for men.
(The Asahi Shimbun dated April 2021)
Follow the book from Chapter 1, as it is published.

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Author: Shin Ushijima