Archive for September, 2009|Monthly archive page

Corporate Governance in Japan – changes proposed but don’t hold your breath

Corporate Governance in Japan

            – changes proposed but don’t hold your breath

 Japan’s newly elected Democratic Party is planning to introduce a new law for public companies, according to Reuters (Tokyo 2 September 2009).  At least one third of their boards would need to be independent non-executive directors. Of course, this would do no more than bring Japanese board structures in line with those in many other countries, including China.  But it would mean a major shift in opinion and practice for most Japanese listed companies.

 The keiretsu networks in Japan, with companies connected through cross-holdings, inter-trading and interlocking directorships are well known. (Tricker page 90-1, 187-9)  Reflecting the social cohesion important to Japanese society, keiretsu emphasise unity throughout an organisation, non-adversarial relationships, lifetime employment, enterprise unions, personnel policies encouraging commitment, decision-making by consensus, and promotion based on loyalty and social compatibility as well as performance.

 Independent non-executive directors, in the Western sense, have been unusual.  Many Japanese executives do not see the need for such intervention “from the outside.”  Indeed, they have difficulty in understanding how outside directors operate. “How can outsiders possibly know enough about the company to make a contribution when the other directors have spent their lives working for the company” they ask?  “How can an outsider be sensitive to the corporate culture?  Surely they would damage the harmony of the group.”

 Traditionally, investors have played only a minor role in corporate affairs. Power lay within the keiretsu network.  There was no market for corporate control since hostile takeover bids were virtually unknown.   However, for the past decade, with the Japanese economy facing stagnation, traditional approaches to corporate governance have been questioned.  A 2008 report by the Asian Corporate Governance Association commented: (

“We believe that sound corporate governance is essential to the creation of a more internationally competitive corporate sector in Japan and to the longer-term growth of the Japanese economy and its capital markets. While a number of leading companies in Japan have made strides in corporate governance in recent years, we submit that the system of governance in most listed companies is not meeting the needs of stakeholders or the nation at large in three ways:

• By not providing for adequate supervision of corporate strategy;

• By protecting management from the discipline of the market, thus rendering the development of a healthy and efficient market in corporate control all but impossible;

• By failing to provide the returns that are vitally necessary to protect Japan’s social safety net – its pension system’

However, Tsutomu Okubo, a government policymaker, has suggested that the new bill will take three to four years to be introduced and at least another year to become law. Jamie Allen, Secretary General of the Asian Corporate Governance Association, believes that there will be strong lobbying against a mandatory requirement for independent outside directors.  Change in Japan comes slowly.

 Bob Tricker