Chairman's Message 2018

Japan Association of Corporate Directors
Chairman Yoshihiko Miyauchi

External Environment

The Japanese economy remained generally strong during the last fiscal year. Corporate activity showed a similar trend with the net profit of listed companies, for example, increasing by about 30%. One reason for this is that growth in corporate earnings depends just on a favorable economic environment but also on the fact that capital markets have now begun to strongly demand growth in the business results delivered by companies. However, there is only one Japanese company among the world's top 20 in terms of net income. This fact shows the Japanese firms are still a long way from reaching a satisfactory level or one that is comparable to the past achievements of Japanese companies. There is also the reality that the growth potential of Japanese companies has not yet attained to the global standard.

These facts require us, the Japan Association of Corporate Directors (JACD) to continue to get to grips with the major issues that need to be addressed. The purpose of the JACD is to contribute to the establishment of corporate governance in Japan. The ultimate goal is to ensure that Japanese companies possess a high level of the power to achieve growth, can carry out their daily operations while still maintaining a management attitude of challenging innovation, reaching a place that is not inferior to world standards, and one of the ways of achieving these objectives is to promote the enhancement of the system known as corporate governance.

Recently, with the spread of the corporate governance code and the stewardship code, nearly 95% of companies listed on the First Section of the Tokyo Stock Exchange have introduced two or more independent directors, and so, compared with a few years ago, the pace of progress made in corporate governance reform is remarkable. In addition, ROE, one of the key management indicators for every company, has risen to around 8%-10% overall. These changes also represent a pleasing development both for Japanese corporate management and for the nation's economy. However, this does not mean that we can stop our activities now. Given that we've always insisted on a point of view that stresses that "Independent Directors should make up more than half of the board of directors" and "ROE should be in two digits", we need to acknowledge that we are still only halfway on the road to our ultimate goal. Further changes are predicted given developments such as the corporate governance code having been reviewed again this year, the succession of the CEO and the engagement with investors, suggestions being made about proposals for improvement regarding important issues, and the assertive and proactive involvement of institutional investors expected at general meetings of shareholders. Under such circumstances, the JACD wants to proceed powerfully in the direction of further enhancing and strengthening Japan's corporate governance.

The Activities of the Association

2017 has seen the awareness and understanding of corporate law, the provisions of various kinds of codes, and the recognition of compliance, become more widespread among listed companies.

The JACD has also been focusing its attention on its public relations activities so that its achievements can become known more widely and in greater detail. We have also engaged in the exchange of opinions with the relevant ministries and agencies and with the media, as well as participating in events sponsored and organized by overseas and other organizations. We provided knowledge and information to our members, entered into deliberations about the roles required of independent directors, and advocated the necessity of introducing corporate governance to the corporate executives. Through dialogue held with overseas investors, we have continued our efforts to deepen their understanding of our activities. To take one example of this, the award system entitled Corporate Governance of the Year has enabled us to highlight the fact there are companies now being established in Japan that excel both in corporate governance and in the performance of their business.

It is also a pleasure to have been able to announce examples of positive progress being made such as the formal progress represented by introduction of independent directors by each companies, and positive trends such as the rise in earnings benchmarks such as ROE, and especially the survey data that shows the share price performance of JACD member companies proving to be far superior to the TOPIX average.

Where the Problem Lies

Corporate governance is "a system to enable a company achieve its objectives and goals in the most efficient way", but recent developments have meant that results falling outside of this outline have started to appear in that it is being utilized rather as a system to stimulate escape from long-term stagnation and low rates of growth. We are not satisfied with this situation however, and we see the next step as being to further upgrade corporate governance into being a system that aims to further elevate corporate activity to world standards.

It is not the case that no concerns exist about the trends and movements that are currently underway however. For example, recent scandals at several companies have had an influence in ensuring that efforts are made to strengthen governance into being just a system of auditing and monitoring that functions simply to eliminate scandals.

Moreover, in the current design of the system, companies with Boards of Corporate Auditors in particular have no role assignment for execution and supervision for their directors, and so we have no choice but to manage the Board of Directors and particularly focusing on the deliberations on matters relating to the execution of their duties. Because independent directors are also responsible for making resolutions, it is also a fact that it is difficult for them to urge the company executives to grow strongly. Even at company with audit and supervisory committee, and at company with nominating committee, etc., both the executives and independent directors tend to be somewhat biased towards placing the emphasis simply on preventing misconduct.

It will become increasingly important from now to focus on the process of how to select the CEO that is directly engaged in the original purpose of governance, that is to say how to create a mechanism that ensures that fully motivated tare chosen. The crucial issue is how independent directors can actually appoint the strong CEO in practice, since this in turn requires a shift to the stage where the actual results can be scrutinized and questioned.

The nature of corporate governance should also be shifted from form to content, for example, actions that conform to the objectives of the legal system, changes in company management's way of thinking, etc. should surely be directed towards our viewpoint. If we are satisfied with the current reforms, it is to be feared that we will surely lag behind overseas companies and that this will inevitably lead to the stagnation of the Japanese economy.

Theme of JACD's Activities

With the cooperation of market participants such as investors, the JACD plays a role as a guide in reforming company executives' awareness, not just of the system. This is one of its most important activities.

In order to grow a company sustainably, both positive energy and innovation are needed, and with company executives having to survive these pressures to increase corporate performance, they clearly need to abandon the current status quo.

To drive the growth, not just the shape, company executives will create innovation, and run it at full power, while the directors create a mechanism to support and monitor it. One could say that corporate governance has only become established now that such a mechanism has become a common sense tenet of corporate management.

There are also a lot of things that the corporate management of Japan should take pride in having achieved so far, and so, in addition to promoting management reform and combining it with corporate governance, surely it will be possible to aim to make the sustainable development of the Japanese economy a reality.

The JACD will continue to develop such activities speedily, enjoyably, and freshly, and thereby contribute to corporate society.