Innovate Governance

Innovate the management of Japanese corporations

Corporate governance reforms in Japan: Management and supervision of Japanese corporations

Corporate governance reforms in Japan are a key factor in reviving economic growth. Companies are managed by the Chief Executive (CEO) and the Executive Management Board (CEO, CTO, CFO and other executives, who are company employees).

The Supervisory Board discusses and approves or vetoes all major decisions of the company, and evaluates the performance of the Corporate Executives, and if necessary replaces company executives including the CEO. It is best practice, and in some countries regulatory requirement, that the Supervisory Board Members are not employees of the company, but are independent and bring a range of experience and knowledge to the decision making of the company, and to the supervision of the company’s executives.

In most major countries, including USA, UK, Germany, Switzerland, Sweden etc, the Executive Management Board and the Supervisory Board are separate and independent and composed of different people.

In Japan traditionally and until recently, Executive Management Board and the Supervisory Board are one and the same, ie the Executives of traditional Japanese companies supervise themselves.

It is obvious that such self-supervision has big disadvantages, and may be one of the major reasons for Japan’s weak economic growth over the last 20 years (e.g. stagnation of Japan’s electronic industry giants), and several recent corporate scandals (e.g. Toshiba’s accounting issues, Olympus’ accounting issues, SHARP’s financial performance leading to take-over by Honhai Precision Industries, Mitsubishi Motors’ issues etc).

The failure and problems at several foreign subsidiaries in Japan ultimately may have been caused by corporate governance malfunctions.

Corporate Governance reforms in Japan: improving how companies are managed and supervised

Over recent years, Japan’s Government, The Tokyo Stock Exchange (Japan Exchange Group), and the Japan’s Financial Supervisory Agency have been changing Japan’s corporate governance rules to improve the management and supervision of companies incorporated in Japan.

Corporate Governance reforms are one of the most important components of Japan’s Governments initiatives to help Japan find economic growth again. An additional advantage for tax payers: corporate governance reform costs essentially no money – unlike traditional ways of stimulating the economy by injecting money and public works, eg. building bridges and tunnels.

The speed with which Corporate Governance Reforms in Japan are being introduced surprised even one of their main promoters, emeritus Group CEO of the Japan Exchange Group (holding company of the Tokyo Stock Exchange), Atsushi Saito, as expressed in his recent talk.

Three major changes are the basis of corporate governance reforms in Japan:

The Company Law of Japan
The Corporate Governance Code
The Stewardship Code

For details see: Laws and codes defining corporate governance in Japan

The three duties of the Board of Directors

According to the new Japanese Corporate Governance Code issued by the Japan Exchange Group (holding company of the Tokyo Stock Exchange and several other Japanese Stock Exchanges), the Board of Directors has the following three duties:

setting the directions of corporate strategy
encourage and support appropriate risk taking by senior management
supervise Directors and executive management, including senior executives (執行役員)

For details see: Laws and codes defining corporate governance in Japan

The Association of International Board Directors of listed Japanese Corporations

Bringing global experience, diversity and depth to the decision making of Japanese Board’s of Directors

A very small number of foreigners brings deep international experience, independence, globally competitive performance and knowledge and diversity to Japanese companies’ Boards of Directors, and deliver this experience in Japanese language.

We estimate that only about 0.5% or less of Board Directors of Japanese Stock Exchange listed corporations are foreign.

We founded The Association of International Board Directors of listed Japanese Corporations in order to

enable foreign Directors (取締役) on the Board of Directors (取締役会) of listed Japanese corporations to help each other in their difficult and very important responsibilities
assist Japanese corporations which understand the value of diversity and the value of international participation in the corporate decision making at the level of their Board of Directors