ISS has proposed a policy for Japan essentially opposing the creation of “advisory” posts for retired directors or kansayaku, who can tend to over-influence the decisions of currently serving executives because the “advisors” were previously the “senpai” (seniors) of executives, thus creating bottlenecks or “legacy” issues can make changing strategy difficult. This occurs notwithstanding the fact that “advisors” bear no fiduciary duties, cannot be sued by shareholders, and require no disclosure (not even regarding their compensation). At the same time, METI has announced that it will undertake a study about the impact of such positions.
Such advisory posts are a custom in Japanese corporate governance that I have publicly opposed for some time, even before I proposed the full disclosure of all compensation paid to “advisors” when proposing the contents of the Corporate Governance Code to the FSA in 2014. (Unfortunately, the FSA did not include that provision. )
While ISS’ proposed policy is the outcome of my recommendations in an indirect sense, in fact I have had no recent discussions whatever with anyone at ISS about this topic, and it is most accurate to say that concern about the practice simply “percolated” and came to be shared by many others over the past few years. This is further evidence of a deepening dialogue and consideration of key issues related to corporate governance practice in Japan.
I would like to encourage those who have comments on the proposed policy to respond to the questions below by sending an email to: jp-research@issgovernance.com
ISS Announcement:
“Japan Policy – Creation of Advisory Posts
Background and Overview
Many Japanese companies employ former senior executives in an advisory capacity, often for many years after they retire from their executive posts. The advisors typically receive compensation and benefits from the company, and continue to maintain an office there; however, unless the advisors remain on the board of directors, there is rarely any disclosure of their activities or their compensation, and they have no fiduciary duties to shareholders. The influence and lack of accountability of corporate advisors have attracted considerable attention in recent years, in particular in connection with the accounting scandal at Toshiba Corp., which employed a number of former executives in an advisory capacity.
Key Changes Under Consideration
There is not currently an ISS policy on the creation by companies of advisory posts, such as “sodanyaku” or “komon,” which are held by former senior executives.
However, the proposed new policy will entail generally recommending against amendments to articles of incorporation to create new advisory positions such as “sodanyaku” or “komon,” unless the advisors will serve on the board of directors and thus be accountable to shareholders.
Intent and Impact
Of Japanese companies covered by ISS in June 2016, 28 percent include provisions in their articles of incorporation relating to the appointment of senior advisors. It is expected that no more than a handful of companies will seek to add such provisions to their articles in any given year, so only a limited number of companies will be directly impacted by the proposed policy.
Nonetheless, the intent of this policy is to send a message to the market that shareholders are concerned that former senior executives could continue influencing companies in an advisory post,
while it is difficult to hold them accountable. The presence of former senior executives as advisors makes it difficult for their successors to reverse course on their predecessors’ strategic decisions, even when doing so would be good for the company. Furthermore, the continued employment of former executives by their “home companies” reduces the pool of available candidates to serve as outside directors at other firms, contributing to Japan’s low level of board independence.
Request for Comment
Should ISS recommend against amendments to articles of incorporation to create new advisory positions, unless the advisors will serve on the board of directors and thus be accountable to
shareholders?
Please add comments, if needed.”
– Posted by Nicholas Benes
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