Archive for the ‘Japan’ Category

Pay Ratios


Interest by the media, the public, and shareholders in the pay of CEOs has never been higher, and governments have increasingly taken notice of this in recent years. It is perceived as inequitable and often unjustifiable as to why there should be such large discrepancies between the pay of CEOs and of the employees in their companies. Recent legislation in some countries, and proposed legislation in others, has sought to address this concern by ensuring that companies disclose the ratio of CEO pay and the median employee’s pay in their company.

US Companies

In 2015 the SEC adopted amendments to Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, on pay ratio disclosure such that companies have to provide details of the relationship of the annual total compensation of their employees and the annual total compensation of their Chief Executive Officer (CEO), i.e. the ratio of the CEO pay to the median of the annual total compensation of all employees. This applies to companies’ for their first fiscal year beginning on or after 1st January 2017.

Honeywell International, a large multinational corporation, was the first major U.S. public company to disclose its ratio of CEO pay to that of the median employee with a pay ratio of 333:1.

The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) highlights that in the S&P 500, Mattel had the highest ratio of CEO pay to median worker pay with a ratio of 4987:1. They reported a higher ratio still in the Russell 3000 where Weight Watchers International had a pay ratio of 5908:1. More detail is available at:

UK Companies

In the UK, listed companies with more than 250 UK employees will legally be required to annually publish and justify the pay difference between chief executives and their staff for the first time. The regulations governing pay ratios will, subject to Parliamentary approval, come into effect from 1 January 2019 with companies reporting their pay ratios in 2020.

The disclosure of pay ratios is part of a move to hold larger companies more accountable for CEO pay and will provide helpful insights into the difference between CEO pay and average employee pay in different sectors and in individual larger companies in the UK.



Japan is a country whose CEOs have traditionally earned less than their global peers and where the ratio of CEO pay to that of the average employee has been lower than in countries such as the US. Part of this is attributable to the culture of Japan where very high pay ratios between CEO pay and average employee pay would not be viewed favourably.

It will be interesting to see what the impact of the disclosure of pay ratios in the US and other countries will be in the coming years.  Already shareholder revolts over executive pay during 2018 are growing and high pay ratios of CEO pay to the average employee’s pay could increase shareholders’ dissent on this issue.


Chris Mallin

June 2018


Tokyo Electric Power and the disaster at Fukushima Daiichi

A great deal has been written about the cause and effect of the nuclear power station disaster at Fukushima Daiichi, which followed the Japanese tsunami and earthquake. No doubt more will be said in the future. But relatively little attention has been paid to the governance of the company behind the Fukushima plant. This case and commentary look at some aspects of the governance of the Tokyo Electric Power Company (TEPCO). The material comes from the second edition of Corporate Governance – principles, policies and practices due in 2012.

The TEPCO case study
In an unlikely outburst, Naoto Kan, the Japanese prime minister, shouted “What the hell is going on?” to executives of the Tokyo Electric Power Company (TEPCO) following Japan’s worst nuclear crisis at the Fukushima Daiichi nuclear power plant, after the tsunami and earthquake on 11 March 2011. Were the directors or the corporate governance systems and procedures at fault?

The company appeared to have a commitment to sound corporate governance. As it stated on its web site:
“At TEPCO, we have developed corporate governance policies and practices as one of the primary management issues for ensuring sustainable growth in our business and long-term shareholder value. We believe in strengthening mutual trust through interactive communication with our valued stakeholders, including shareholders and investors, customers, local communities, suppliers, employees and the public, so we can move forward toward solid future growth and development. Therefore, TEPCO considers enhancing corporate governance a critical task for management and is working to develop organizational structures and policies for legal and ethical compliance, appropriate and prompt decision making, effective and efficient business practices, and auditing and supervisory functions.”

The TEPCO web site explains the company’s corporate governance processes:
“The Board of Directors currently comprises 20 directors, including 2 outside directors. Also, TEPCO has seven auditors, including four outside auditors. The Board of Directors generally meets once a month and holds additional special meetings as necessary. Based on interactive discussion with objective outside directors, the Board establishes and promotes TEPCO’s business and oversees its directors’ performance. TEPCO has also established the Board of Managing Directors, which meets once a week in principle, and other formal bodies to implement efficient corporate management through appropriate and rapid decision making on key management issues, including those deliberated by the Board of Directors. In particular, we have established internal committees to deliberate, adjust and plan the direction of the whole Company across a range of key management concerns, including internal control, CSR and system security, as well as stable electricity supply.”

“For more appropriate and quicker decision making, TEPCO also has the Managing Directors Meeting generally held once a week and other formal bodies to efficiently implement key corporate management issues, including those to be discussed by the Board of Directors. In particular, the Board has inter-organizational committees such as the Internal Control Committee, CSR Committee, System Security Measures Committee and Supply and Demand Measures Conference to intensively discuss directions of key management issues across the entire company.”

But behind the reassuring corporate governance explanations on the TEPCO web site lay a different reality. The company’s opaque handling of the situation at the stricken plant was widely criticized. The extent of the danger was minimized and the full extent of the damage only gradually became apparent, as the risk severity level was gradually increased to rank alongside Chernobyl as a most severe nuclear accident.

The effects in Japan included damaged to fishing and agriculture through radio-activity in sea and soil, disruption in manufacturing as power supplies were rationed, and longer-term strategic concerns about the future of nuclear power generation. Around the world, the effects included slow-downs in production as supplies of parts from Japan dried up, concerns about the safety of Japanese produce, and serious questioning about the safety and strategic future of nuclear power.

TEPCO’s handling of the incident exposed failings in its risk management systems. The company had a history of safety violations: in 2002, it falsified safety test records and in 2007, following an earthquake, its Niigata nuclear plant had a fire and a leak of radioactive water, which were concealed.

In fact the board was dominated by inside directors, qualified by their seniority within the company. Out of the 20 directors, 18 were insiders, whilst of the two nominally outside directors one of them, Tomijirou Morita, was chairman of Dai-Ichi Life Insurance, which was connected financially with TEPCO. In 2008, Tsunehisa Katsumata, the company president at the time of the 2007 problem, was elevated to chairman, being replaced by Masataka Shimizu, another career-long TEPCO employee. TEPCO had never appointed a head from outside the company.

TEPCO commentary
At first glance, the web site seems to reflect a company strongly committed to sound corporate governance: ‘corporate governance policies and practices a primary issue’, ‘interactive communication with our valued stakeholders’, ‘corporate governance a critical task’. So how to account for the discrepancies between the company’s alleged concern for corporate governance and the catastrophic failure of its Fukushima reactors?

Some clues can be found in the web site explanation of the company’s corporate governance. Notice the emphasis on ‘management’: ‘corporate governance is a primary management issue,’ ‘corporate governance (is) a critical task for management.’ The directors seem to make no distinction between management and governance. Nor is that surprising, because they are the same people. 18 of the directors are executives at the top of the management hierarchy, and one of the two alleged outside directors is not independent.

The classical model of Japanese corporations and their keiretsu groups reflects the social cohesion within Japanese society, emphasising unity throughout the organization, non-adversarial relationships, lifetime employment, enterprise unions, personnel policies encouraging commitment, initiation into the corporate family, decision-making by consensus, cross-functional training, and with promotion based on loyalty and social compatibility as well as performance.

In the classical Japanese model, boards of directors tend to be large and are, in effect, the top layers of the management pyramid. People speak of being ‘promoted to the board’. The tendency for managers to progress through an organization on tenure rather than performance means that the mediocre can reach board level. A few of the directors might have served with associated companies, others might have been appointed to the company’s ranks on retirement, or even from amongst the industry’s government regulators (known as a amakaduri or “descent from heaven”).

But independent non-executive directors, in the Western sense, would be unusual, although the proportion is increasing. Many Japanese 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,” they question, “when the other directors have spent their lives working for the company? How can an outsider be sensitive to the corporate culture? They might even damage the harmony of the group.” A study by the Japanese Independent Directors Network, in November 2010, showed that of all the companies on the Nikkei 500 index, outside directors made up 13.5% of the board, women 0.9% and non- Japanese 0.17%.

TEPCO fits this model perfectly.

However, the classical model of Japanese corporate governance is coming under pressure. With the Japanese economy facing stagnation in the 1990s, traditional approaches to corporate governance were questioned. A corporate governance debate developed and the stakeholder, rather than shareholder, orientated corporate governance model came under scrutiny. Globalisation of markets and finance put further pressure on some companies. The paternalistic relationship between company and lifetime ‘salary-man’ slowly began to crumble.

Some companies came under pressure from institutional investors abroad. Company laws were redrafted to permit a more US style of corporate governance. But few firms have yet embraced them. Signs of movement included calls in 2008 by eight international investment funds for greater shareholder democracy, and a report from the Japanese Council for Economic and Fiscal Policy to the prime minister proposing that anti-take over defences be discouraged and the take-over of Japanese firms be made easier.

Perhaps the TEPCO experience will encourage further moves towards enhanced corporate governance.

Bob Tricker 20 April 2011

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