Corporate governance reforms in Japan: innovate supervision and management of Japanese corporations

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:

  1. The Company Law of Japan
  2. The Corporate Governance Code
  3. 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:

  1. setting the directions of corporate strategy
  2. encourage and support appropriate risk taking by senior management
  3. 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

More about The Association of International Board Directors of listed Japanese Corporations here.

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News

Corporate governance reforms in Japan: a talk at the Embassy of Sweden

Corporate governance reforms in Japan Changing the way Japanese corporations are managed: Can it make Japanese iconic corporations great again? A talk by Gerhard Fasol at the Embassy of Sweden organized by the Embassy of Sweden, The Swedish Chamber of Commerce in Japan (SCCJ), and the Stockholm School of Economics Abstract: Changing the way Japanese …

Association of Foreign Board Directors of listed Japanese Corporations – inauguration meeting

The co-founders of the Association of Foreign Board Directors of listed Japanese Corporations held the inauguration meeting on Thursday 14 April 2016 in Hong Kong. Gerhard Fasol, Co-Founder and Co-Chair Jason Sausto, Co-Founder and Co-Chair Copyright·©2015-2016 ·Eurotechnology Japan KK·All Rights Reserved·

SHARP governance and Japan’s electronics sector

SHARP and Governance SHARP is a Japanese electronics company with 44,000 employees and YEN 3000 billion (US$ 30 billion) in sales, many factories and a product portfolio ranging from rice cookers, office copiers, solar panels, robots, mobile phones, to supplying APPLE with displays. SHARP faces repayment of YEN 510 billion (US$ 4.2 billion) in short-term …

What is corporate governance and why?

Structure for transparent, fair, timely decision-making by companies, with attention to shareholders, customers, employees, communities

Japan’s Corporate Governance Code, which was issued by the Tokyo Stock Exchange on June 1, 2015, defines Corporate Governance as “a structure for transparent, fair, timely and decisive decision-making by companies, with due attention to the needs and perspectives of shareholders and also customers, employees and local communities”.

Seeking sustainable corporate growth and increased corporate value over the mid- to long-term

The subtitle of Japan’s Corporate Governance Code is its mission statement: “Seeking sustainable corporate growth and increased corporate value over the mid- to long-term”.

Corporate governance has been analyzed in great detail in Professor John Kay’s analysis of UK’s capital markets: “The Kay Review of UK Equity Markets and long term decision making“, which was triggered by certain M&A transactions among other factors, and published on 23 July 2012.

“The Kay Review of UK Equity Markets and Long-Term Decision Making” has been archived in UK’s National Archives here.

The Kay Review analyzes UK’s capital markets in depth, and argues that its companies’ duty to be successful in the long-term, and its only the success of companies that brings wealth to all stake holders and people who invest in companies, in many cases pensioners. Over the years a fine grained system of specialized service providers has developed between companies on one side, and individual investors on the other side. Professor Kay argues that this system of intermediaries (fund managers, analysts etc) can be seen as “overhead” and needs to be as efficient as possible.

Capital markets need to be built on long term trust and stewardship, not on anonymous one-time monetary transactions (John Kay)

Overall the capital market system needs to be built on long term trust and stewardship, not on anonymous one-time monetary transactions.

Short term focus on quarterly financial performance may cloud the view on long-term success and investment (John Kay)

The Kay report had important impact, for example it led to the end of the requirement of quarterly financial reports by UK companies, as we discussed here.

Martin Lipton, of the NY law firm Wachtell, Lipton, Rosen & Katz, in an article published on the Harvard Law School Forum on Corporate Governance and Financial Regulation blog encourages the US Securities and Exchange Commission (SEC) to keep the UK developments in mind, when reforming the reporting requirements for US corporations, and also calls for an end to the requirement of quarterly reporting.

Why end the requirement of quarterly financial reports? Because short term focus on quarterly financial performance may cloud the view on long-term success and investment. Intense discussions between fund managers and management are strongly encouraged.

Will the end of quarterly financial reporting reach Japan?

Laws and codes defining corporate governance in Japan

Laws and codes

Laws and codes for corporate governance reform in Japan, he basis for Japan’s corporate governance are:

Company Law (会社法)

The revision of the Company Law (会社法(平成十七年七月二十六日法律第八十六号)), Law No. 816 of July 26, 2005. The latest revision is No. 63 of September 4, 2015 (平成二七年九月四日法律第六三号).

The Corporate Governance Code of the Tokyo Stock Exchange (TSE)

The Corporate Governance Code of the Tokyo Stock Exchange (TSE), issued on June 1, 2015, “Seeking Sustainable Corporate Growth and Increased Corporate Value over the Mid- to Long-Term”

Japan’s Stewardship Code of the Japan’s Financial Services Agency (FSA)

Japan’s Stewardship Code, issued by Japan’s Financial Services Agency (FSA) on February 26, 2014, “Principles for Responsible Institutional Investors ≪Japan’s Stewardship Code≫- To promote sustainable growth of companies through investment and dialogue”

Copyright (c) 2015-2017 Eurotechnology Japan KK All Rights Reserved

Members of The Association of International Board Directors of listed Japanese Corporations

not all members are listed here.

Chair and Committee of The Association of International Board Directors of listed Japanese Corporations

Gerhard Fasol, Co-Chair

Gerhard Fasol
Gerhard Fasol

Entrepreneur and Physicist, works in Tokyo since 1991. CEO and Founder of Eurotechnology Japan KK, working on business development in Japan for foreign technology firms, on crossborder M&A transactions and on international business development for Japanese corporations, independent Board Director and member of the Board of Director’s Audit Committee of the Japanese Cybersecurity group GMO Cloud KK, and Founder of the Ludwig Boltzmann Forum.
Graduated with PhD in Physics from Trinity College and the Cavendish Lab, Research (Title A) Fellow at Trinity, later Teaching Fellow and Director of Studies in Natural Sciences at Trinity. Founded the Trinity in Japan Society in 2014. Fluent in German, English, French and Japanese.

Web: fasol.com

Contact by mail

Jason Sausto, Co-Chair

Jason Sausto
Jason Sausto

Board Director and Executive Officer of Onkyo Corporation.

Jason is passionate about sound business in Asia. Jason began his career as a graphic designer in Japan, where he was an amateur digital film-maker on the side. His other passion – technology – led him to found an internet startup called Bookings Japan. Bookings Group was later bought by Priceline and Jason moved on to get his MBA at INSEAD and a master’s degree in International Relations from SAIS. He returned to the business world as the Beijing-based Managing Director for Silicon Valley’s tech titan Red Herring magazine. Currently he is on the Board of Directors at Onkyo Corporation and runs ONKYO’s operations in Asia and China. Jason lives in Hong Kong and is fluent in Japanese and Mandarin Chinese.

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