Chairman's Message 2015

Japan Association of Corporate Directors
Chairman Yoshihiko Miyauchi

Business Environment

In 2014, corporate governance started showing signs of a major change for the first time, attracting the attention of the wider business community.

The 2014 Japan Revitalization Strategy under Abenomics stated that to restore Japanese companies' earnings power it is necessary to strengthen corporate governance. It also required investors to comply with the Stewardship Code while requiring companies to comply with the Corporate Governance Code. In line with the enactment of the Companies Act of Japan, revised in May 2015, there is an expectation that the growing trend to strengthen corporate governance will bring positive changes to companies and to society. The question is, what impact will the changes bring to Japan's business world?

The stock market has started to regain momentum as the Nikkei average has risen to a 15-year high. While some continue to take a cautious stance, there have been gradual signs of improvement in business sentiment. One sign is increased investments in Japanese companies by overseas investors, who anticipate significant improvements in corporate governance, in addition to a weak yen and low crude oil prices.

Rules to appoint independent directors and incorporate ROE performance indicators into the Corporate Governance Code has resulted in managements becoming more aware of corporate governance. More and more companies are actively conducting dividend increases, share buybacks, M&A, etc. The media has started to mention ROE when talking about companies' financial results, and even report on who has been proposed for independent director nominations at general meetings of shareholders (GMS).

Historically, the corporate governance system was formed due to investor demands. Japan's current system has been criticized for being created under the leadership of public offices, and for lacking sufficient regulation of companies compared to Europe and the United States. It is worth noting, however, that the corporate governance system is taking shape, and with accelerating progress. How to keep the momentum alive will be key for Japan's business world.

Activities of the Association

Amid growing attention to corporate governance, the Japan Association of Corporate Directors engaged in a wide range of activities in 2014 to promote corporate governance.

We held a series of discussions with members regarding the development of the new system mentioned previously, and submitted the results to related public offices and institutions. We believe this has had an effect. Through committee activities, we shared information and held discussions on the current status of Japan's business environment. We have created a database of independent directors focusing on members of this association to accelerate the appointing of independent directors. In addition, we conducted trial trainings focused on the expected roles of independent directors. Independent directors interested in these activities have become members of our association.

Through a series of dialogues with institutional investors, we recognized differences in positions and perceptions between them and managements of Japanese companies, such as the perception regarding investment returns, the time needed to examine proposals from shareholders' meetings, and the timing of shareholders' meetings. We also improved communication with the media, and as a result many of our comments were published, helping us have a certain influence. Through seminars and study groups, we provided practical business information.

Despite all of our efforts, I feel that these activities still had only a minimal impact on business leadership, and that we need to do more to achieve our goals of appealing to a wider community.

The Understanding of Corporate Governance

Listed companies are now required to appoint at least two independent directors. In addition, the revised Companies Act of Japan has newly enabled companies to choose to have an audit committee system, helping introduce outsiders' perspectives to the board of directors of Japanese companies. The focus of the discussions will shift from whether or not to allow independent directors to participate in the board to the expected roles of independent directors.
Japan's Corporate Governance Code [Final Proposal], announced by the Japan Financial Services Agency and Tokyo Stock Exchange, stated that managements have a fiduciary responsibility to shareholders, and required the board of directors to oversee management to ensure companies' sustainable development. In particular, independent directors are required to assess management's business performance and to ensure that the evaluation is acted upon. The Code states the need to separate oversight and business execution as much as possible, which can be considered a major breakthrough in the attitude toward corporate governance.

In Japan's business world, however, business leaders expect independent directors to work with an audit and supervisory board to prevent misconduct and provide management advice. The Japan Association of Corporate Directors believes independent directors' sole functions should be voicing their opinions to management on behalf of shareholders. Similar to GSMs, at every board meeting independent directors should evaluate financial goals, their progress, and results from the market's perspective, as well as check whether the company is operating as it should, and whether management is appropriately performing its functions.

Generally speaking, there continue to be large differences in the perception of the roles of independent directors, stemming from different understandings of the tasks of the board and the positions of directors at Japanese companies. In particular, at companies with an audit and supervisory board, which account for the majority of Japanese companies, the board of directors has primarily focused on reviewing executive functions required under Japan's Companies Act. This has caused directors to act solely as officers responsible for each section's business execution and has generally prevented them from providing oversight functions.

If many companies are to seriously carry out business practices in the spirit of the corporate governance as it was originally conceived, it is necessary to create an environment where independent directors can maximize their potential by transforming the board of directors into an organization providing oversight, delegating business execution functions to management as much as possible, and reducing the frequency of board meetings. In the future, it is likely that revisions of the Companies Act, such as a shift to a company with committees system, or a separation of the board of directors' oversight and business execution, will become necessary.

We believe it is our mission to lead the business world in discussions about important issues related to corporate management.

2015 Activities

Now that the corporate governance reform is being implemented, instead of being satisfied with the current situation, we are determined to make further progress. We will continue to work to increase awareness in the business world that the primary and essential role of independent directors is to oversee management's performance from the market's perspective. If we can change the perception of people who serve as independent directors and of companies, we will be able to create corporate managements that can satisfy global market requirements. We are determined to accelerate our activities in that direction.

Most companies may try to satisfy the minimum standards by making no changes other than appointing two independent directors. Even so, there should be an increasing number of companies willing to make more changes to enhance corporate governance, so that they will be recognized in the global market. We are working to engage in activities this year to support such companies.

Meanwhile, it is important to remember that the implementation of corporate governance is not a purpose, but a means to help companies achieve growth.

The Japan Association of Corporate Directors is facing the mountainous task of ensuring effective functioning of corporate governance. These include separating business execution and oversight of the board of directors, and clarifying the meaning of independent directors, audit committees, and oversight, all of which are the essence of corporate governance. With the enthusiastic support from our members, however, we will continue to promote economic development through corporate governance and engage in activities that contribute to society.

English translation courtesy of