January 2016
The primary cause of Japan’s prolonged economic stagnation is that Japanese companies have been unable to withdraw from unprofitable businesses or consolidate companies, preventing the reallocation of corporate assets.

→To overcome this, the following are currently necessary:

①Further Strengthening of Governance

Continuous enhancement of corporate governance, primarily through ongoing review of the Corporate Governance Code. Improvement of pension fund governance aimed at ensuring the Stewardship Code is effectively implemented and functions properly.

②Improving Labor Market Rigidity

Introduction of a new employment category, “Regular Employee Type 2”

Strengthening Corporate Governance
1. Institutionalize the continuous follow-up of the Corporate Governance Code.

Following Germany’s example, where governance was improved through the introduction of a Corporate Governance Code, the Code in Japan should be reviewed annually and continuously revised.

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○　Formally establish a permanent, small specialized body to conduct evaluations and make proposals for this purpose.

・While the introduction of the Code is highly commendable, it is important to recognize that it only marks the starting line.
・Many countries have failed with similar Codes. To ensure the success of the Code in Japan, it is crucial to follow through with full responsibility until the end.
・Establishing a permanent body formally demonstrates the government’s long-term commitment and clarifies accountability.

○　Key items to add to the Corporate Governance Code in the near term:

Creation of an Independent Outside Director Advisory Committee

・・A committee composed solely of independent outside directors that provides written advice to the board on matters such as nominations, compensation, and other issues where management interests may conflict with those of the company.

Disclosure of post-retirement compensation for directors (advisors, consultants, etc.)

・This would eliminate de facto “director compensation” that does not receive shareholder approval. The existence of “ghost directors” who bear no responsibility to shareholders is a concern for both domestic and international investors, and it also hinders decisive decision-making by current management, impeding corporate growth.
2. Issues to be addressed through legal reforms, etc.

○　Promote interactive and meaningful general meetings of shareholders

Address the problem of concentrated AGM dates.

・The corporate tax filing deadline (Article 75-2 of the Corporate Tax Act) is a bottleneck. Amendments to the Corporate Tax Act or guidance should remove this barrier.
・Specifically: ① Extend filing deadlines (1 month → 3 months) if auditors cannot provide an unqualified opinion; ② Limit the number of AGMs held per day (via law or stock exchange rules).

Establish frameworks for interactive AGMs in the internet and smartphone era

・To move beyond “formalistic” meetings, steps toward interactive AGMs are essential.

・For example, the Ministry of Economy, Trade and Industry’s study group on electronic AGM processes should include: ① Internet streaming of AGMs, ② Real-time voting, ③ Provision of online spaces allowing numerous shareholders to participate anonymously and ask questions, enabling efficient pre-AGM dialogue with the company.

○　Expansion of the Executive Officer System

Begin efforts to abolish the “executive officer” system.

・The so-called “executive officer” system was created to reduce the number of board members and improve governance. However, since it is not recognized under the Companies Act, executive officers are effectively positioned similarly or equivalently to directors but are not subject to shareholder accountability (i.e., they cannot be sued under derivative shareholder actions), resulting in weakened governance. The core issue is that the Companies Act does not allow non-director executive officers in companies without nominating committees.
・Specifically, the Companies Act should be amended to permit the appointment of non-director executive officers (“executives”) even in companies without nominating committees.

2. Improving Pension Fund Governance

Enhance governance to fully mobilize pension funds, which are a “sleeping giant.”

・The success of the Corporate Governance Code depends on whether investors, particularly pension funds as asset holders, can take substantive action. This is the essence of the Stewardship Code. Improving investor governance is essential for effective stewardship.

Specific Measures:

1. Establish mechanisms for beneficiaries to hold pension fund directors accountable.
Currently, beneficiaries (employees) have no direct means to pursue accountability, leaving directors effectively unaccountable for management.

2. Establish professional knowledge standards for pension fund directors, etc.
“In that case (referring to the AIJ incident), the pension fund directors who were deceived were actually investment novices, and many were ‘amakudari’ from the former Social Insurance Agency, which drew strong criticism.” (Noruo Higuchi, What the AIJ Case Suggests—A Society Without a Fiduciary Duty Law, Shōji Hōmu No. 1985)

3. Promote adoption of the Stewardship Code by pension funds.
・Currently, only one non-financial corporate pension fund has signed the Stewardship Code.

4.Ensure that pension funds reliably exercise their voting rights and require disclosure of voting records (by individual company and agenda item).
・Similar obligations should also be imposed on institutional investors other than pension funds.

5. Have the GPIF publicly declare its support for the Corporate Governance Code.
○ The Stewardship Code should be reviewed annually and continuously revised.

The Stewardship Code should be reviewed annually and revised based on surveys of implementation, following the UK model.

3. Creation of “Regular Employee Type 2”

○ Introduce an open-ended employment contract (“Regular Employee Type 2”) allowing dismissal with severance proportional to tenure.

・As Japan’s industrial structure has shifted from being manufacturing-centered to one where 80% of GDP comes from the service sector, improving labor market flexibility is urgent.
・Currently, companies face only two options: regular employees, who are difficult to dismiss, or fixed-term non-regular employees. Hiring regular employees carries significant risk for companies, while investing in non-regular employees is risky due to their fixed-term status. Consequently, it is difficult to develop and retain talented personnel.
・“Regular Employee Type 2” provides companies with predictability regarding dismissal, enabling withdrawal from unprofitable businesses. At the same time, setting reasonable severance compensation benefits employees.

(Note: Since this simply adds a new option, it does not conflict with the previous stance of the Abe administration. As it is a policy beneficial to workers, there is no reason for the Democratic Party to oppose it.)
○ Benefits of Regular Employee Type 2

1. Companies will find it easier to hire employees.
・Many companies had been hesitant to hire women and non-regular employees as full-time regular employees.
2. It creates incentives for companies to invest in human capital development and training that lead to productivity improvements.
・If productivity improves through human capital development, employee benefits and rewards will also increase.
3. It enables companies to withdraw from unprofitable businesses and allows for the reallocation of corporate assets.
It helps address the problem of skill mismatches.
~To Promote Reform~

○ Factors Hindering Reform

Stakeholders clinging to vested interests (e.g., pension product providers)

Fragmented bureaucracy (e.g., Ministry of Health, Labour and Welfare vs. Financial Services Agency vs. Ministry of Economy, Trade and Industry)

○　Policy-making needs to be free from political constraints

・　Develop policies based on objective data analysis.

・　Expand the use of external experts and establish a system that prevents obstruction by bureaucrats with vested interests, while ensuring that external experts are properly compensated to enable them to act responsibly.

・　Formulate clear policies at an early stage through political leadership, excluding bureaucratic interference.

・　Establish a neutral think tank independent from government ministries to support the Cabinet Office, enabling it to not only analyze data but also take the lead in formulating concrete policies.

Nicholas Benes (As an individual)