Chairman's Message 2016

Japan Association of Corporate Directors
Chairman Yoshihiko Miyauchi

The Economic and Business Climate

The economic picture at the end of 2015 made it difficult to be optimistic about the outlook. Economies of emerging countries, which had been driving global economic growth, were sluggish. Excess production capacity in China is a major cause. Emerging country economies were further impacted by the sharp drop in prices of natural resources and raw materials. Economic growth has been weak in industrialized countries, too. There are concerns about Europe, and the U.S. economy alone does not have the strength to fuel global economic growth.

In Japan, the economy was healthy in 2015 but subsequently began to weaken. A sense of stagnation is slowly increasing for the economy overall even though corporate earnings remain strong. The Japanese economy is apparently no longer on track for implementing strategies for growth. This raises the question of whether or not Japan can end the prolonged period of sluggishness. Can Japan enact the necessary government initiatives and structural reforms? There are still no answers to these critical questions. But even in this difficult environment, we are seeing progress involving corporate governance.

Japan has established a Corporate Governance Code and Stewardship Code to help companies continue to grow. The adoption of these codes has greatly increased the number of companies that have outside directors. Furthermore, many companies are switching to the Company with Supervisory Committee system that is part of the revised Companies Act.

The term corporate governance has become commonplace in media reports, making 2015 the beginning of true corporate governance in Japan. As a result, this was also a year of significant achievements for our association. Normally, the private sector, including institutional investors, and financial markets should be the driving force behind corporate governance actions. But in Japan, the public sector has played a leading role.

There have been several incidents in Japan involving corporate governance. Fraudulent accounting at a well-known company and the difficultly of selecting a president at a company with strong earnings are two examples. Due to these events, Japan has finally reached the point where companies must seriously think about the duties of directors and the board of directors. Companies need to demonstrate the effectiveness of corporate governance rather than establish a framework merely for appearance.

Activities of the Past Year

As companies in Japan cope with an economic environment with an uncertain outlook, the perception of corporate governance has changed significantly.

The Japan Association of Corporate Directors used many activities centered on corporate governance during the past year to help create the management systems needed for companies to grow. We conducted training programs for outside directors and executive officers. There were also many seminars and research reports about the roles of directors and the board of directors, linking executive's compensation with results of operations, and other subjects.

With the cooperation of associations in Japan and other countries, we examined the stances of executives and the performance of growing companies in Japan with a commitment to corporate governance. We then gave awards to the most outstanding companies. In addition, we exchanged information with public-sector organizations that promote corporate governance in order to build relationships rooted in cooperation. Furthermore, there was an increase in the number of individuals recommended as outside director candidates to our member companies. Another activity was forums to share points of view about the Company with Supervisory Committee system, internal controls, accounting systems and other new corporate systems.

We used the media along with seminars and other events to make many people aware of our stance regarding various issues. However, more work will be needed in order to obtain the support of the majority of Japan's business community for the positions of our association.

Advancing from Words to Actions

Companies with outside directors in Japan and the number of these directors have increased dramatically. Due to this progress, some people think that Japan has established a framework for corporate governance. But in many cases, there are only about two outside directors, which is well below a majority of all directors. This is why we believe that Japan has taken only one step toward a corporate governance system that matches the global standard.

Corporate government activities are improving, too. However, Japanese companies are still inferior in terms of capital efficiency, meaning their ability to generate profits. Many companies say they have outside directors for the purpose of receiving advice from a broad spectrum of viewpoints. I believe that companies need to shift their focus to the true objective of electing outside directors: the oversight of management. Views about management systems at Japanese companies should obviously differ in some respects with the views of U.S. and European companies. Simply trying to emulate the U.S. and European systems is therefore not enough. Japan's private sector must take the lead in order to create an advanced management system with characteristics that are unique to Japan.

Our association believes that serving as a system of checks in order to drive corporate innovation and mid- to long-term growth is the essence of corporate governance. Directors must monitor a company's performance throughout the year and use this information to determine compensation and actions for achieving goals in the future. Key roles of directors include recommendations to replace executives with unsatisfactory performance, compensation that matches the accomplishments of capable executives, and the establishment of a management succession plan.

Today, mid- to long-term growth requires the ability to compete successfully on a global scale. Companies that continue to operate as they did in the past will soon reach a dead end. Sustained growth is impossible without innovation. Corporate governance must include a board of directors with the functions and oversight required to help companies use innovative thinking. Of course, each company has its own distinctive traits. But all companies share the same fundamental characteristics.

Companies should also remember that innovation is not limited to technologies. New ideas are needed for services, transaction formats, network creation and many other types of business operations.

At all companies, both executives who operate businesses and the directors must constantly work on improving their skills. Can our board of directors really supervise business operations? Does this oversight contribute to the company's growth? Is our company satisfying the demands of customers? Executives and directors should seek answers to questions like these in order to understand the essence of corporate governance while always acquiring new information.

2016 Activities

This year is the 15th anniversary of the establishment of the Japan Association of Corporate Directors. Our association remains dedicated to using many activities for increasing the effectiveness of corporate governance based on its core principles and goals.

Altering management systems that have been used in Japan for decades or even longer will take time. Five to 10 years may be required. Japan should not necessarily try to copy every element of U.S. and European management systems but aspects of corporate governance that need improvements should be changed.

Discussions will be held on the shortcomings of Japanese companies in order to improve the oversight capabilities of the board of directors. Then member companies and other listed firms will be encouraged to resolve the issues identified through these discussions.

We want everyone to recognize the Japan Association of Corporate Directors as a source of support for corporate governance. We are a place where people can participate in discussions and obtain information about corporate governance. In 2016, we will continue to serve as a guide for companies and institutional investors to the next steps of progress for corporate governance in Japan.