Best Practice Regulatory Models and the Case for Divergence of

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