Corporate Governance in Japan
Board Structure and its implication to the function of the Board – Japanese Experience
Policy Dialogue on Corporate Governance in China
26th February 2004
Masatoshi Toriihara,
Statutory Auditor, CSK Corporation and Member, Committee of
Corporate Governance, Japan Association of Corporate Directors
1．Transitions of Japanese-style management
・・・1980s
1960s
High-growth period
Japanese-style management
2000～
1990s
Economic bubbles
Lost decade
New corporate governance
(Limitation of Japanese-style
governance)
Era of Japanese-style corporate governance
Governance by management, bank and
economic agencies of state
Mutual dependence among
companies
Crossholding of shares,
main financing bank system,
company groups, etc.
Japanese-style employment
practice
Lifetime employment,
seniority system,
company union, etc.
Change of capital market
Reform of the board
of directors
Indirect financing → Direct financing
Shift to borderless economy
Global economization
Introduction of
US-style
Independent
board members
Trade and capital liberalization
Big ban, IT revolution
System selectivity
Industrial policy
Administrative control,
public-private cooperation framework,
coordination in a industry group, etc.
Ambiguous corporate accounting
practice
Limited disclosure of corporate
information
Corporate scandal
Executive
officers
・
・
・
Enhancement
of auditor's
authority
Shareholder
value
2．Transitions of corporate governance
・・・1980s
Points (issues)
1960s
Heyday of Japanesestyle management
Cross shareholdings
Main financing bank system
Lifetime employment
Promotion by seniority
2000～
1990s
・Employee board member
・Stultified as an auditing organization
(representative from each department)
(auditor and executor)
Loyalty
・No external control
Moral
・Large number
・Expansion of the president's (CEO's)
authority
・Authority for personnel shuffle of the
President's auditor
Administrative control
Auditors
・Authority for
operational audit
・Several statutory
auditors
・3 years,3 auditors
・Accounting auditor
system
・Coordination with
accounting auditors
・Board of auditors
・Independent auditors
（
Reform
1993
Major reform / selectivity
・Introduction of
executive officers
・Internal
appointment
）
1998
2002
・Company with the boad
committee established
・Independent dorectors
2003
・Term: 4 years
・Independent auditors
（more than half）
・Independence
1985 Privatization of
2003 Launch of Japan Post
(Public company)
Nippon Telegraph and Telephone Public Corporation (NTT)
1987 Privatization and separation of the Japanese National Railways (JR)
3．Request for establishment of corporate governance
with emphasis on shareholders
Fund-raising of the companies has consistently depended on indirect financing centered on banks since the
World War II. It is now shifted to direct financing-oriented fund-raising after experiencing financial Big Bang
and collapse of bubble economy.
Loan
Individual
Main financing
bank
Change of company's fund raising
・Financial crisis
・Big Bang
・Deregulation of stock
market
Crossholdings
of shares
＜Indirect financing＞
Corporate
stock
Credit
＜Direct financing＞
Transition of shareholding ratio by holder
％
70.0
Financial institutions
Individual shareholders
60.0
Increase of individual shareholders
50.0
40.0
The total number of individual shareholders
increased 250, 000 to 33,770,000.
It has been increasing for 7 years in a row.
Business corporations
30.0
20.0
Foreign shareholders
Annuity trust
10.0
Investment trust
0.0
1950
55
60
65
70
75
80
85
90
95
2000
02
National stock exchange 2002
4．Selective system
～Commercial law revision on board reform～
Commercial law revision of 2002 focused on enhancing compliance and transparency/efficiency of the management
using external human resources (independent board members), and established the new system which separates the
operating organization from the supervisory organization and ensures the effectiveness of agile management and
supervisory functions. It also allows major corporations to select the company form from the following models.
Auditor model
Company with the committee established
Objectives
Existing type
Shareholders’
meeting
Auditors’
meeting
Board meeting
Selective
Company with the major asset committee established
Shareholders’
meeting
Auditors’
meeting
starting from
April 2003
・Evaluation of achievement of management objectives conducted by the
independent directors.
・Audit by audit committee
・Operation of performance-linked reward system by the compensation
committee
・Change of the president (CEO) by the nomination committee
Shareholders
meeting
Board meeting
Nomination
committee
Audit committee
Compensation
committee
Board meeting
Executive officer
Major asset committee
62 companies have been shifted to this type of company form
from April 2003 to October 2003.
5．The company with committee established
62 companies have been shifted to "Company with committee established" from April 2003 to October 2003.
The reason for this shift is "to speed up the management dramatically by clearly separating the supervisory
function from the operating function and to realize the fair and highly transparent management“.
There are several tendencies for the companies adopting "Company with committee
established" type. Most of such companies fall into pattern 1 or 3 at present.
1. Adopted for placing emphasis on the group strategy
Hitachi
2. Adopted mainly expecting the increase of foreign investors
Sony, Mitsubishi Electric
3. Adopted by holding company and affiliated company
Nomura Holdings
4. Adopted by being affiliated by foreign company
Seiyu
5. Others
6．Independent director
Qualification for an independent director
【Fiscal year 2002】
Independence
Representative of
stakeholders
Total of 112 companies
Q. Companies adopting the independent director ⇒ 55.4%
High sense of ethics
Q. Origin of independent directors (see the table before)
Rank
Deep understanding
of social common
practice
Sound judgment
・Top management of the other company with extensive
experience in business
・Experts on law, academic, and international relations
・Former employees of competent authorities
・Person related to the correspondent bank such as a
main financing bank
・Representative of consumers or local community
Person involved in the company having a business relation.
19
2
Person involved in the company having no business relations.
12
4
5
”
Person involved in the parent company.
Person involved in the bank such as a main financing bank
Institutional investors (life insurance) who are big shareholders.
Person involved in the same enterprise group
12
11
8
8
7
Critics, economists, management consultants
5
8
Scholars such as university professors
3
”
Former employees of competent authorities
3
10
Person involved in public entities
2
11
Person of legal profession such as lawyers
1
(Reference: The proposal of "Business Administration
Committee" by Japan Association of Corporate Executives)
An independent director is the person who has not been
involved in business and affairs of the corporation of interest
or the affiliate company as a board member or employee from
past to present.
Number
1
”
Who is qualified to be an independent director?
Origin (personal history・attribute）
―
Current
situation?
Others (accounting companies, person involved in the company
of big shareholder)
5
At least approx. 1000 out of the total 1,500 independent
directors in the listed companies are big shareholders or
former employees of the main financing bank or the same
enterprise group.
7．Scope of responsibility
Legality audit
・Audit on legal compliance
・Audit on compliance with internal rules
Validity audit
・Audit on validity of management
decision
Auditor (meeting)
○
△（Note）
Board meeting
○
○
Board meeting
（Audit/ Compensation /
Nomination Committee）
○
○
Auditing system
Board meeting of
the company with
the committee
established
Note: Auditor performs legality audit. However, laws and regulations include the duty of care and the auditor needs to check for
breach of such duty regarding the matters involving business judgment by the board members. Therefore, legality audit performed by
the auditor has almost the same effect as the validity audit.
8．List of audit overview / structure
Item
Audit by auditor
Audit by single auditor
Number of auditor
Number of independent auditor
Number of statutory auditor
Appointment of auditor
(committee member)
Term of auditor
(committee member)
Subject of audit
Authority of audit
Scope of audit
3 or more
One or more (more than half after 2 years)
One or more auditor is elected by mutual vote
Shareholder meeting
4 years
Execution of board's duty
Investigation right on operation and property
Investigation right on the affiliated company
Attendance at the board meeting・statement duty
Legality audit including significant injustice
Audit by audit committee
Systematic audit by the audit committee
3 or more
Majority of the committee members
Not required legally
Board meeting
1 years
Execution of board's and executive officer's duties
Investigation right on operation and property
Investigation right on the affiliated company
Legality audit including validity audit
9．Effect of governance
～ High-low comparison of JCGIndex～
JCGIndex is an index for the maintenance level of the company's governance system
The following graphs show the result of questionnaire conducted from July to September 2003. (No. of response: 201companies)
7
（％）
5
6.45
5.57
6
4.69
5
（％）
4.68
4
3
4
3
2
2
1
1
2.26
-0.03
Low JCGIndex
company
0
0
Low JCGIndex
company
High JCGIndex
company
Company answered
all items
-1
ROA (combined: average of last 3 years)
2
（％）
（％）
1.68
1.5
Low JCGIndex
company
High JCGIndex
company
Company answered
all items
-4
1
0.58
0.5
0
-0.5
-6
-5.58
-8
-10
Company answered
all items
ROE (combined: average of last 3
years)
2
0.97
0
-2
High JCGIndex
company
-8.54
Rate of return on stock (average of last 3 years)
Low JCGIndex
company
High JCGIndex
company
Company answered
all items
-1
-1.5
-1.35
-2
Increase of No. of employee (average of last 3 years)
10．What is corporate governance ? (For whom? For what?)
■Corporate governance focuses on "to whom management is directed".
■A corporate is a social existence and bears various responsibilities in the society.
Points for corporate governance
Management
Compensation
・Awareness for corporate social responsibility
Customer Payment
Employee
Salary
・Establishment of check & balance system
・The ultimate issue is a human mind
(ethics, responsibility)
Cost
Globe・
Environment
Company
Supplier
Payment
Tax
Interest Creditor
Government
Profit
Shareholder