Taking a Horse to Water – Prospects for the Japanese Corporate Governance Code

This paper was originally published by Zeitschrift für Japanisches Recht (Journal of Japanese Law) in its 2019 Spring edition (Vol.24). It is reproduced here by kind permission of the Executive Editors.

SUMMARY

“In 2014–2015 Japan implemented a series of reforms to its corporate governance regime. The principal measures adopted were the country’s first Corporate Governance Code, revisions to its Companies Law, and a Stewardship Code, together with a report (the Itō Review) on corporate competitiveness and incentives for growth. In this paper we analyse the objectives of these reforms and make an assessment of their likely success.

METRICAL/BDTI:Ratings of 1,800 companies (July 2019 Update)

In our July ratings, a more nuanced pictured emerged for Japanese companies. The significantly positive correlation of financial performance with the percentage of INEDs and the number of Female Directors disappeared this month, suggesting that an increasing number of non-superior performers are “copying” other companies in this respect, and/or have only only done so recently so no positive impact (should there be any) is discernible.

Discussion in Japan About “Clawback Clauses”

In Western countries, many companies have introduced “clawback clauses” that require executives to return performance-linked compensation to the company in certain cases. In Japan, very few companies have such clauses. There are dissident voices saying things like “compensation of Japanese executives is less than in Western companies, so there is no need to do that,” or “if you want to demand the return of paid compensation, you can file a derivative lawsuit.” In this article, I would like to review the arguments that have been made so far about clawback clauses, and consider the arguments that should be made in the future.

Disclosure of Executive Compensation Required by New Cabinet Office Order… and Companies’ Responses

On January 31, 2019, the Cabinet Office Order on Disclosure of Corporate Affairs was amended, and the format of for securities reports was changed. With regard to the securities reports for the fiscal year ending March 2019, it is said that the employees in charge of dealing with the new format were put under considerable stress and extra work. The most troubling item was probably the section on executive compensation.

The revision of the Cabinet Office Order was made in response to the Financial Council Disclosure Working Group (DWG) report published on June 28, 2018. Mr. Carlos Ghosn was arrested in November of the same year, and executive compensation, which has been a subject of much debate for some time, once again disturbed the public mind. The new format, modified under these circumstances, calls for broader and detailed information disclosure. However, the top executives of many companies view disclosure of compensation as undesirable, because it has carries the potential for divisiveness or embarrassment. Mr. Ghosn’s false statement of compensation was attributable to this sense of aversion. Not only him, but also many other executives, desire as a basic human emotion to avoid disclosure of the amount of their compensation.

What were these two contradictory vectors, – requirements from Cabinet Office Order, and the company leaders’ intentions – reflected securities reports? Although we should wait for the thorough analysis on many securities reports published at the end of June 2019, in this article I would like to convey the initial impression that I obtained by surveying a few of them.

Japanese Institutional Investors Need to Take Their Own ESG Medicine

Does anyone have any theories as to why institutional investors that support director training in Japan are overwhelmingly foreign, and not Japanese?

The Board Director Training Institute of Japan (BDTI) was established as a “public interest” nonprofit in order to enable Japanese institutional investors to support something badly needed by their home market, director and governance training, on a tax-deductible basis…. so that such training could be offered at high quality yet low price, thereby spreading customs of governance/director training throughout Japan. However, after running BDTI for eight years since obtaining certification, we have noticed a disturbing but continuing reality: over time, more than 95% of BDTI’s donations from institutional investors have come from foreign institutions or fund managers, and less than 5% of donations to BDTI have come from Japanese institutions. Moreover, none of the Japanese institutional donors are “major” (top 30) investing institutions in Japan.

Communication Protocols for Acquisitive Strategic Investors with Board Nominees in Japan

The Corporate Counselor – Insights into Japanese Corporate Law –

by Stephen D. Bohrer and Yusuke Urano, Nishimura & Asahi NY LLP

Summary: “Strategic investors owning more than 10% of the shares of a Japanese company often seek board appointment rights as a measure to protect their investment. Board appointment rights offer a strategic investor a number of significant benefits, such as permitting the strategic investor to obtain useful information about the business plans and key technologies of the company. Although the director nominated by a strategic investor could breach contractual commitments and fiduciary duties if such director relays certain confidential information to the strategic investor, it is inevitable in these arrangements that a strategic investor will obtain some key information that it ordinarily would not have obtained had its nominee not served as a director.

The receipt of confidential information is a double-edged sword for a strategic investor as such information can be very useful for investment monitoring and competitive purposes, but at the same time can result in a violation of Japanese securities laws if a strategic investor makes a purchase or sale while in possession of material non-public information (“MNPI”). Consequently, a strategic investor contemplating a securities transaction with a publicly traded portfolio company (a “Public Investee Company”) in which it has a nominee serving on the board should implement communication protocols to channel information flows to and from its director nominee and the Public Investee Company so the strategic investor does not breach Japanese securities laws (curiously, the prohibition under Japanese insider trading rules does not apply to a privately held company).”

METRICAL:Corporate Governance Rating of Japan’s 1,800 companies (June 2019)

“Policy Stockholdings”
Many companies set the fiscal year to end at the end of March and hold their AGM in June. Those companies file Yuho financial reports by the end of June. According to the Yuho reports, we are able to lots of new data at this time. Among the data, in this post we will focus on ”policy stock” holdings, also known as “allegiant shareholdings”.

The average holding of “policy stocks” was JPY34,861 million for 1,775 companies, which has come down 13.7% from JPY40,389 million a year as the average of the 1,794 companies in our universe. Of course, we should carefully analyze these numbers, but the decrease of the stock holding was larger than the change in the stock index Topix for the same period. The Topix fell 7.3% from 1,716.30 on March 31 2018 to 1,591.64 on March 31 2019.

June 14th “Director Boot Camp” – Another Successful Program! Next Course: September 12th, 2019!

On June 14th, BDTI held its English Director Boot Camp , attended by a number of highly experienced participants. Participants from various companies heard lectures about corporate governance by Nicholas Benes and Andrew Silberman of AMT, and exchanged experiences and opinions at a spacious, comfortable room kindly donated for our use by Cosmo Public Relations, a leading communications and PR firm in Tokyo.

METRICAL: CG Top 20 stocks slightly underperformed in May… and a focus on board chairs

Chair of the Board of Directors
We would like to highlight the function of the chair of the board. Of about 1,800 companies, only 27 companies are chaired by an outside director. This indicates just how resistant inside directors are in entrusting the position of chair of the board to an outside director. The table below shows the 27 companies.