Best Practice Regulatory Models
and the Case for Divergence of
Independent Directors in Japan
Matt Nichol
Assistant Lecturer
Department of Business Law & Taxation
Monash University
Presentation Overview
Independent directors as a concept
Who promotes the global best practice model for
independent directors?
The Japanese best practice model for independent
directors (& auditors)
Limitations on the global best practice model for
independent directors
Japan as evidence of divergence in a global best
practice model for independent directors
A. Independent Directors as a
Creating a Global Concept
 Independent directors can be contrasted to
non-executive directors, outside directors
 difference is conflict of interest
 Role of independent directors
1. act as a check on management;
2. represent shareholder interests (minority);
3. mediate interests between conflicting interests.
Independent Director Rules as
‘Soft’ Law
 Independent
director rules & corporate
governance rules are found in securities
exchange listing rules and codes of corporate
behaviour - ‘soft’ law
 Self regulation
Enforcement and penalties
 Impact of consolidation of exchanges?
B. Who Promotes the Global Best
Practice Model for Independent
Global Best Practice Model of
Independent Directors
Anglo-American Model
rules located in securities exchanges
50% of majority independent directors
Deviations in model
independent chair person
reporting non-compliance - annual report
Promoters of Independent
 Internationally - US & UK
Especially after corporate collapses eg. Enron
 Japan - industry/‘big’ business
Ministry of Economics, Trade & Industry - METI
METI - Corporate Governance Study Report 2009
- recommended TSE introduce independent
Members of 2009 report included ‘big’ business
and keidanren
C. The Japanese Best Practice
Model for Independent Directors
(& Auditors)
Hybrid System of Japanese
Corporate Governance
 Japanese corporate governance is based on the
traditional German inspired kansayaku auditor
 New Company Law 2004 - introduced optional
Company with Committees
 initial low uptake - 3%
 50% outside directors/auditors
 Two systems same problems
 Sony - committees, foreign CEO
 Toyota - retains kansayaku system
The ‘Japanese’ Model
 Amendments in 2009 to TSE Securities Listing
 Rule 436-2 - TSE listed company must have at least
one independent director/auditor who must represent
the interests of general shareholders
 independent director/auditor to be selected from ‘outside’
director/auditor under the Company Law
 protect directors from shareholder derivative action
 non-compliance - advise TSE when providing notice of
independent directors
 no definition of ‘independence’
D. Limitations on the Global Best
Practice Model for Independent
Corporate Governance as a
‘Localised’ Product
Impact of culture, institutional structure,
economics, politics, history and society on:
corporate governance practice; and
regulatory system
Anglo-American model of independent
directors - 50% - not a good fit for Japan too many outsiders
‘Insider’ Corporate Culture
in Japan
 Post-WW II corporate governance
 cross-shareholdings, ‘main bank’ holdings and lifetime
employment = ‘insider’ firms
 holdings decreased since 1990s BUT insider culture
 Meiji period zaibatsu opened to outsiders
 pragmatic - new legal rules - need people outside the
family trained in rules regarding corporate structure
and ‘modern’ practice
 unlikely to be repeated - Japanese companies resisted
outsiders for 10 years
Institutional Culture of Japanese
 Creating insider culture through mission statement
 place posters or framed copy of mission statement in
 taught to employees in training
 produced in a booklet or in-house magazines and
 new employees make pledges and affirmations
 Group harmony and the apology
 Shimatsusho and jidan
 Tokugawa village and ostracism - murachibu
Formal Compliance with TSE
 Split of independent directors and auditors
 Independent auditors - 75% - 3,314
 Independent directors - 25% - 1,046
 Number of independent directors and auditors
 0 - 6.4%
 1 - 48%
 2 - 22.9%
 3 - 12.3%
 4 - 4.9%
 5 - 3.2%
 6 - 1.5%
 7 & 8 - 0.5% & 0.3%
E. Japan as Evidence of
Divergence in a Global Best
Practice Model for Independent
 Was the Anglo-American model adopted in Japan?
 most firms still use kansayaku
 one independent director/auditor
 no independent chair
 weak reporting for non-compliance
 Formal compliance
 70% companies have one or two independent d/a
 2008 average size of board - 18.30 (down from 31.94 in
Exporting the Japanese Model
 Japan as an Asian leader
 despite economic problems countries still look to Japan’s
quick economic success - Malaysia
 western technology & concepts - China
 FDI by Japanese companies in Asia
 trade
 establishing subsidiaries in cheap local labour markets
 Japan’s model as an ‘Asian’ model
 better cultural fit than Anglo-American model
Avoiding independent director rules?
Japan - legal rules
Singapore - institutional structure & politics

Best Practice Regulatory Models and the Case for Divergence of