Chairman's Message 2014

Japan Association of Corporate Directors
Chairman Yoshihiko Miyauchi

Changes in the Business Environment

The Japanese economy has started to make a recovery driven by the effects of Abenomics, the economic policies of the Abe administration which took office at the end of 2012.

Abenomics consists of three arrows -- bold monetary policy, flexible fiscal policy, and a growth strategy that encourages private investment. The first and second arrows that have been implemented under the leadership of the government and the Bank of Japan have produced positive effects including the correction of the strong yen and a hike in stock prices which led to a gradual recovery in corporate performance.

However, the positive effects we have seen so far are more of a reflection of high expectations. Japan's future depends on how Japan taps into the vitality of private companies to achieve growth in the future.

The Abenomics' growth strategy consists of macro policy measures accompanied by regulatory reforms and government-led economic system reforms including the Trans-Pacific Partnership (TPP) and micro policy measures that draw out private sector vitality by encouraging innovation. One of such examples is the reform of corporate governance including the promotion of an outside director system through the revision of the Companies Act of Japan, introduction of a new corporate model -- companies with an audit committee, and development of Japan's Stewardship Code.

As of this moment, the growth strategy under the macro policy has yet to produce substantial results and thus has not been fully appreciated by the market. Although a large number of companies are reporting record high profits, these positive results appear to owe largely to high expectations, weak yen, and high stock prices in Japan as well as the solid U.S. economy. Unfortunately, we have yet to see major developments in addressing problems that have long been considered unique to Japan's corporate culture. Those are: low capital efficiency (ROE), large financial assets in hand (cross-shareholding, internal reserves), and maintenance of underperforming businesses.

Japanese companies are expected to go into high gear in pursuing the fundamental goal of maximizing corporate value. Backed by favorable business performance, there has been a sign of changes in corporate attitudes towards corporate governance since the beginning of the fiscal year, including a trend to increase shareholder returns and to introduce an outside director system.

Corporate Governance

Building maximum wealth in the most efficient and effective way is a must for companies to be recognized by society. Looking at these principles of the capitalist economy, we must give credit to Abenomics for incorporating corporate governance in its growth strategy measures.

In line with the revision of the Companies Act of Japan last fall, the term -- corporate governance -- started to appear frequently in the media. The revised Companies Act has incorporated measures and ministry ordinances to strengthen the introduction of outside director system, development of Japan's Stewardship Code, reform of the Government Pension Investment Fund (GPIF), and strengthening of the Tokyo Stock Exchange (TSE) rules. We are about to see progress in these areas. Discussions on whether or not to introduce an outside director system are over; we are expected to enter a new phase to discuss the role of outside directors.

Meanwhile, one of the major obstacles for the promotion of corporate governance is difficulties in fully separating oversight and business execution at companies with auditors which account for the majority of Japanese companies. This is preventing directors from fully demonstrating their oversight functions. In addition, there are concerns that Japan's corporate governance is increasingly "Galapagosized". Unlike corporate governance in the world which seeks to attain higher corporate performance, corporate governance in Japan tends to encourage outside directors to serve as a business advisor or to function as a last resort to prevent misconduct. Furthermore, the addition of a new option -- companies with audit committees -- under the Companies Act has created confusion among management as to which system they should adopt to enhance corporate governance. We are facing an urgent need to facilitate our research on the relationships between corporate governance and corporate structure to develop the guidelines.

Activities of the Association

Through our various meetings, we, the Japan Association of Corporate Directors, have been striving to correct the misunderstanding towards corporate governance including the role of independent directors to prevent misconduct and to serve as a business advisor.

We held a series of discussions on the roles of the government, vitality of private companies supported by corporate governance in a fall seminar and discussed the roles of the board of directors and independent directors in a winter seminar.

Based on these discussions, we issued a proposal on outside directors and board of directors. In the proposal, we clearly stated the role of outside directors as overseeing management as the representative of investors aimed at increasing business performance and achieving growth. Currently, not enough pressures are placed on management to improve business performance and to achieve growth, causing a tendency for management to change or spread goals. There is a surge in the number of companies that appoint outside directors. We published the results of our discussions so that our proposals can be used as guidelines for maximizing their functions.

We are glad to see that a large number of people have registered on our independent directors' database which was launched in the last fiscal year. In some cases, new independent directors were appointed through our database. Through our activities, we were able to make an important first step towards fulfilling our goal of contributing to the growth of Japanese economy focusing on human capital and expertise in corporate governance.

Objectives of the Fiscal Year 2014

In the fiscal year 2014, we are seeing a second wave of corporate governance for the first time since 2001. As mentioned above, a growing wave of reforms, namely the Companies Act, Stewardship Code, TSE rules, and GPIF will no doubt affect companies and investors alike. We, the Japan Association of Corporate Directors, are required to take actions to fully ensure this wave.

In order to prevent corporate governance from ending up as mere rhetoric, we must raise awareness about its true purpose to oversee business management so that outside directors will be able to concentrate on improving corporate value and to increase business performance. While applying the monitoring and other systems, we will strive to increase understanding and disseminate the concept and role of corporate governance including monitoring of business performance, fund use, remuneration, internal controls, and role of independent directors by disseminating global standards.

Based on the roles of outside directors and board of directors that were announced this fiscal year, we are planning to provide training programs to independent directors and companies that have introduced an independent director system. Those who complete the program will receive a certificate. In addition, we will invite investor opinions about Stewardship Code and revise the principles of companies' corporate governance based on the opinions.

These may not be accepted immediately by companies or investors. However, we, the Japan Association of Corporate Directors, are committed to undertaking forward looking activities to stay a step ahead in corporate governance aimed at contributing to the growth of Japanese companies and economy.