Chairman's Message 2017

Japan Association of Corporate Directors
Chairman Yoshihiko Miyauchi

External Environment

Since last year, the environment surrounding our country has changed dramatically. In the United States, a new president was elected, the UK voted for withdrawal from the EU, elections were held in major countries in the EU, and these developments, combined with the rise of protectionism and the geopolitical risks posed by Syria and North Korea, created a situation in which the eyes of the world were fixed on Europe, America, and East Asia.

Although weakness remains evident in the trends in the economies of some emerging nations, the direction of the Japanese economy can be said to be positive, driven by the persistence of China and the rise of the US economy. The IMF has revised up its real growth potential forecasts, GDP is recovering to levels last seen before the Lehman shock, many companies are recording all-time highs in earnings, and stability has been restored to the economic environment. However, low expectations for future growth and weakness in personal consumption mutually influence each other, and so the current situation is that the firmness in the economy is not being sufficiently reflected in either stock prices or in individuals' confidence in the business environment.

The corporate governance system has also started to evolve in order to keep pace with the recovery in the Japanese economy. Specifically, the Corporations Law, the Stewardship Code, and the Corporate Governance Code have come into effect, investors and businesses are complying with them, many firms have become audit committee companies, and almost all companies have begun to introduce outside directors. For those involved in management, the term corporate governance has now become something they have to accept without feeling any sense of incongruity.

Meanwhile, there are instances in which problems are being caused at the elementary level, such as fraudulent accounting, and while corporate governance has resulted in some formal improvements, it cannot be said that a clear answer has been obtained to the question of how to connect it directly to the delivery of successful corporate management results in real terms. The problem of showing whether, and in which ways, the next stage will prove useful in producing real reform in management is now starting to become evident.

The Activities of the Association

Now that corporate governance has got underway, I think that the Japan Association of Corporate Directors (JACD) must continue to deepen the internal discussion of basic themes such as why society allows companies to exist, why corporate governance is necessary, and other similar issues. For example, what does a Board of Directors do, why is it necessary to make a distinction between executive and executive officers, what do the outside directors supervise, and what needs to be done? How can corporate governance be used to reform the low levels of corporate productivity and innovation among Japanese companies? We are currently waiting for a wide range of problems to be addressed including: what should be done about the markets that have allowed these problems to develop; how to address the issue of establishing a culture of fiduciary responsibility in Japan; and what changes need to be made. We in the JACD strongly feel that it would be very positive if we could discuss these issues, summarize and publish the results in opinion letters, etc., and thereby influence stakeholders in a range of related fields.

With these thoughts in mind, we have been conducting training courses for corporate executive officers and outside directors, with a particular focus on the directors who were responsible for such supervision in the previous fiscal year. The contents are based on the past fifteen years of discussion in which we have debated these issues to the stage that the directors can now fully appreciate and support the activities of our association. Moreover, we have also been making efforts to enable overseas stakeholders to better understand the drive towards reform in Japanese corporate governance resulting from the Association's activities so as to answer the question, particularly from overseas, as to whether Japanese companies are really serious about engaging in corporate governance. Furthermore, we have also been focusing our efforts on activities aimed at getting the mass media to come to know the Japan Association of Corporate Directors better.

Recognition of Current Situation

In terms of corporate governance, assuming outside directors as being synonymous with this role, a survey conducted by the Association in 2016 revealed that almost 1,600 of the 1,970 companies listed on the First Section of the TSE have appointed two or more people, and nearly 500 companies have three or more, with the result that some have said that it already looks as if corporate governance is already in place. On the other hand, a glance at the rate of growth achieved by companies, which is the aim of corporate governance, reveals that the number of companies that have managed to raised ROE by close to 10% over a three-year period has shrunk dramatically to just some 50 or so.

There are still only a very few companies fostering innovation in Japan that are also growing strongly or which have the power to generate globally significant levels of earnings. I heard that some companies that have shifted to audit committee company point out that they are in favor of trends such as attempting to match the number of outside directors. There seems to be a belief that corporate governance reform has already achieved its goals. Unfortunately, however, we are not yet providing an answer to question of how the Boards of Directors will respond to the issues of low profitability and low productivity that many overseas investors are doubtful about and question.

Even in strictly formal terms, with outside directors only accounting for around a half or a third of the Board of Directors, there is no movement to the next step, such as establishing a nominating committee or appointing a lead director. We must therefore admit that the history of corporate governance in Japan has only just taken the first step. There is not yet enough consensus on what the true necessity of corporate governance actually is, what kind of institution the Board of Directors should be, what the outside directors actually do and so, as a representative of the Japan Association of Corporate Directors, I feel that the process of reform has to put in a lot of physical effort to keep on running and avoid stopping in its tracks.

Person Responsible for Promoting Corporate Governance

In 2017, it is necessary to develop corporate governance, but at the same time it is also important to reaffirm the original purpose and reality of corporate governance in Japan.

It is essential to properly verify whether or not the management capabilities or earnings power of Japanese companies are really rising or, if not, what is the cause for them failing to do so.

It has become easier to accept the generally held theory that corporate governance exists as a system that boosts management that seamlessly encourages innovation with true animal spirits delivered by a CEO with the leadership abilities and driving force to generate corporate earning power. However, at the moment it is hard to claim that the parties concerned are sufficiently aware of the fact that those responsible for promoting corporate governance are mainly CEOs themselves, and that it is therefore the investors themselves who have the role of putting the pressure on to drive the whole process forward.

Corporate governance has long been regarded in Japan largely as a scandal prevention system, with CEOs tending to link prioritizing their own missions to delivering a stable transition to the next stage for their companies. With the exception of only a few, a large number of companies have elected to choose strong CEOs to defend them for long periods in the wake of the collapse of the bubble economy. Investors and other stakeholders have long turned a blind eye to such situations as being unavoidable. However, we are now in an era in which investors have a challenging spirit and which demands that action be taken to check: whether the systems required from the standpoint of complying with the spirit of the stewardship code are in place within companies and that will also ensure that CEOs that will demonstrate this spirit are chosen; and whether a governance system that encourages CEOs who are not taking risks to go ahead and take them has been built within the firm.

With growth rates slowing for many years now, the issue of how the government's growth strategy will be executed has become an increasingly pressing concern in Japan, and a trend towards believing that national policy holds the key to growth has emerged. Out in the wider world however, it is companies that are playing the leading role in driving their countries' growth, and they have created environments in which CEOs who can lead such growth are active.

Even in Japan, corporations are expected to return to their central role of delivering economic growth through their own development and not depend entirely on the government. Corporate governance is indispensable in support of this process, and so I think that Japan also needs its investors to firmly put these requests to their CEOs.

In this fiscal year, it remains the intention of the Japan Association of Corporate Directors to continue to move forward so that the process of progress towards corporate governance maintains its steady forward momentum.