Engagement in Japan: How to Discuss Director and Executive Education – the Most Necessary Thing!

Executive training is badly needed in order for independent directors to perform their expected role 

When I proposed to the LDP and the government in 2013 that Japan promulgate a corporate governance code, one of the most important principles that I advised should be included in it was a requirement for director and pre-director training.  To anyone who has ever sat on an average Japanese board, the need for this is obvious.  Without more training of both executives and external directors in Japan, it will continue to be very difficult for independent directors to perform the roles that are now expected of them. From personal experience, I know that it is simply not possible to convince engineers who do not understand finance that their company could very easily go bankrupt in two years.

ICGN Urges Japan to Focus More on Independent Committees and Director Training, Other Key Areas

We are pleased to note that against the backdrop of the recent events at Nissan, the Institutional Corporate Governance Network (ICGN)  has submitted a letter to Japan’s Council of Experts for the Follow-up of Japan’s Stewardship Code and Corporate Governance Code, stressing the importance of independent directors, independent board committees, director training, use of a “skills matrix”, capital allocation, disclosures, and a number of other issues that BDTI has been stressing for many years,  – ever since its establishment in 2009, in fact.   On the topic of director training, Kerrie Waring of the ICGN wrote:

” ICGN encourages the introduction of high quality training for independent directors in Japan to help build an understanding of what their role entails, particularly in relation to monitoring management and public disclosures. This would help ensure objective decision-making in response to business issues and in alignment with the company’s vision, mission and strategy. We also stress the importance of financial literacy to ensure that independent directors are able to challenge management on issues such as capital efficiency, the use of cross shareholdings and CEO remuneration.”  (emphasis added) 

All About Board Portals – A primer through the lens of Boardvantage

Board portals have established themselves as a must-have in board communications. The current generation allows boards to go entirely paperless.

A board portal is a secure app or website designed specifically for the purpose of improving communication between a company and its directors. The current generation allows boards to go entirely paperless.

Contents

  • Board Portals: An Overview
  • Evolution of the Board Portal
  • What to Look for in Board Portal Technologya
  • Ready to Learn More?

Public Comment to the Proposed Revisions to Japan’s Governance Code – Nicholas Benes

by Nicholas Benes (as an individual)
April 30, 2018

1. Regarding the Overall Revision Process
2. Regarding Principle 2-6 (Activating the Function of Corporate Pension Funds as Asset Owners)
3. Regarding Principle 1-4 (“Policy Shareholdings”)
4. Regarding Principles 4-1③,4-3② and 4-3③ (Appointment and Termination of the CEO)
5. Regarding Principle 4-10① (The Use of Optional Structures)
6. Regarding Principle 4-14 (Training of Directors and Kansayaku)
7. Regarding Revision of the Machine-Readable Format of Corporate Governance Reports

(Note: This is a translation of a public comment which was originally written in Japanese and submitted in that form to the JPX/TSE.  The original version of the public comment is available here.)

1. Regarding the Overall Revision Process

I would like to express my thanks and appreciation for the hard work of the members of the Followup Committee with respect to this review of the Corporate Governance Code (the “CG Code”) . However,I would note that four years have elapsed since the initial drafting of the Code. As you know, in Germany there is a commission which monitors the effectiveness of the governance code on an ongoing basis, and proposes changes on a yearly basis if and as necessary.

Company Law Reform in Japan:  Losing its Mojo?

by Nicholas Benes

This year, Japan’s governance reform drive will either keep going, or run out of steam. Judging from the amendment of the Company Law that is now underway by an advisory council of the Ministry of Justice (MOJ), the latter is likely.

Strikingly absent is a clear over-arching vision of the most important themes that amendment of the Company Law should address now that the country has a corporate governance code. In other words, what is missing, that can only be addressed via the Company Law?

If the government were truly intent on bringing about behavioral change on the part of all Japanese boards and executives, it would focus on harmonizing key aspects of the confusing array of three different corporate governance models which listed companies can adopt, and moving towards a more consistent version of the “monitoring model” for governance that has become internationally accepted and is now embodied in its own corporate governance code.

To do this, it would change the law to enable boards to flexibly appoint capable (and legally accountable) senior executives from a much wider range of candidates than is currently possible. It would also establish rules that require boards to fulfill the independent supervisory and oversight roles envisioned for them under the corporate governance code, unaffected by managerial self-interest, if they wish to delegate wider authority to executives and pay them incentive compensation determined solely by the board.

2017 OECD Corporate Governance Factbook

Varieties of “Independent” Director in Asia 

As this working paper reveals, however, the meteoric rise of the ‘independent director’ in Asia is considerably more complex than it initially appears. Although the label ‘independent director’ has been transplanted precipitously from the US (in some cases via the UK) throughout Asia, who is labelled an ‘independent director’ (i.e., the ‘form’ that independent directors […]

”Global and Regional Trends in Corporate Governance for 2017” by Russell Reynolds Associates

”Russell Reynolds Associates recently interviewed numerous institutional and activist investors, pension fund managers, public company directors and other governance professionals about the trends and challenges that public company boards will face in 2017. Our conversations yielded a wide array of perspectives about the forces that are driving change in the corporate governance landscape.

”OECD Survey of Corporate Governance Framework in Asia”

”The Organisation for Economic Co-operation and Development (OECD) has recently released a report of a survey that was conducted based on the responses to a questionnaire on corporate governance frameworks that was disseminated to partner organisations in the 14 participating Asian jurisdictions in May 2016. These included Bangladesh, China, Chinese Taipei, Hong Kong, India, Indonesia, Korea, Malaysia, Mongolia, Pakistan, Philippines, Singapore, Thailand and Vietnam.

The survey which is a useful document to all stakeholders that are working towards  corporate governance reforms in the region is a reflection of current status of practices and standards. Role of stakeholders, disclosure of related parties, shareholder rights, board and ownerships structures are some of the key areas highlighted.”

Read the  full report here.

Paper by Naoto Isaka – When Are Uninformed Boards Preferable?

Abstract

In this paper, I analyze the optimal choice of board of directors using the dual role model of boards in Adams and Ferreira (2007). In my model, shareholders choose either an informed board that brings additional private information to the firm or an uninformed board that merely considers the inside information already available within the firm. The board then randomly chooses a good chief executive officer (CEO) with inside information or a bad CEO without such information, and the CEO decides whether to consult with the board when making a project decision. I show that shareholders generally choose the informed board to maximize firm value by utilizing the private information available to the board. However, the shareholders optimally select the uninformed board if the CEO is reluctant to communicate with the informed board for fear it will reject the CEO’s decision. The uninformed board is also optimal when the board has a sufficiently large private benefit of monitoring the CEO, the shareholders feel burdened by any conflict between the CEO and the board, or the firm is involved in many unrelated businesses, especially when the inside information is valuable and the firm needs many outsiders to observe useful outside information. I use some of these implications and casual observation of real-world data to discuss recent trends in the board structure of Japanese firms.