Chairman's Message 2019

Japan Association of Corporate Directors
Yoshihiko Miyauchi, Chairman

Current Status of Corporate Governance

The era changes from Heisei to Reiwa, and expectations for the new era are rising.
Looking back on the 30-years of the Heisei era, we are reminded of a series of striking developments including the emergence of a global market with the disappearance of socialist states, the rise of China and emerging nations, a tremendously rapid advancement in IT that is epitomized by communications technology, and a decline in the superiority of those industries that had hitherto driven Japan's growth.

What kind of age will the new era turn out to be? From now on, we may witness a transition from a time in which Japanese companies could grow as a whole, to one in which the ingenuity of each individual company might result in the severity of the market economy coming into clearer focus, as the differences between the relative superiority and inferiority of each of the companies come to be more obviously discernible.

One of the new waves in corporate management involves the activities of the Japan Association of Corporate Directors. The wave is an attempt by company executives to understand corporate governance and to stimulate business activity. Related organizations are currently engaged in revising the Companies Act, and enforcing stewardship codes and corporate governance codes.

In tandem with these developments, Japanese companies have put in place a form of corporate governance and have introduced independent directors, with nearly 900 companies having transitioned to being companies with an audit and supervisory committee. In addition, they have become much more aware of ROE and other performance indicators, of which their awareness used to be significantly inferior to those of Western companies, and so, although not enough yet, clear signs of improvement can now be seen.

However, it still seems that many companies feel relieved that the corporate governance and stewardship code has achieved the standards for corporate governance reform simply by putting multiple independent directors in place. Unfortunately, however, there are only some of the leading companies that are highly aware of the reforms, leverage their corporate governance, improve management, and reflect them on business results.

It may well be that other company executives are under the impression that corporate governance is sufficiently satisfied just by adopting the required format. There are many parts of the process, however, in which institutional investors are now requiring a far greater degree of reinforcement be made such as further increase in the number of independent directors, enhancement of the supervisory function and improvement in the performance of the Boards of Directors, future growth potential, necessity for the preparation of various reports, and clear messages being sent out from corporate managements.

Activities of the Association

Through holding study sessions, the Japan Association of Corporate Directors now has a long history of conducting a great many discussions about the Purposes of Corporate Governance, Dialogues with Investors, Boards of Directors, CEOs, Independent Directors, Internal Controls, and so on.

The Association has also created an award system entitled "Corporate Governance of the Year", which marked its fourth anniversary last year, that has enabled it to spotlight companies that excel both in corporate governance and in performance of their business and honors these top-performing companies. Reflecting on the selection process for these awards, I had a powerful realization that there were already many high-level, high-quality companies in Japan, and I felt strongly aware of the fact that they were developing their own corporate governance in their own way.

On the one hand, then, although corporate governance reform has clearly achieved results, so it may also be the case that the majority opinion is that it is still better to manage in the conventional way.

I feel strongly that the future challenge of the Japan Association of Corporate Directors is to make many companies realize that they really do have to act in order to put corporate governance into practice, and to make them move forwards towards this goal.

Corporate Governance Reform

Corporate governance reform, which has been promoted both by the government and by the private sector, really must therefore be transformed from "appearance" to "reality". Specifically, it will be necessary to better organize how to conduct the management of businesses, enhance market competitiveness, strengthen medium-to-long-term growth potential, and so, as a result, have the results of these improvements be reflected in stock prices. To create such a positive cycle, it will be necessary for company executives to establish a consensus on what the true meaning of "reality" is in this context and what it consists of.

For example, the following behavior may well be a far cry from the true nature of the corporate governance that is being sought: Being designated as CEO by one's predecessor, not by the nomination committee. Becoming the next CEO, with the aim of being able to hand over to one's successor without having suffered any major failures. The Board of Directors ends up being chased to carry out the task in hand. The Board Chairman handles the agenda coming up from the secretariat of the Board of Directors without any consideration. Independent directors speak quite far from the management supervision and talk based on their own experience.

In every industry, CEOs and Executives always think about innovation, plan for the fulfillment and future growth of their conventional operations, and so continue to deliver these results. The Board of Directors oversees the executives and guides them in a positive direction, and the chairman sets the appropriate agenda. In each role, it is required that the matters that should be core be consolidated in a compatible manner and that their aims are not scattered.

From now on and into the future, it will be critically important to clarify the roles and tasks of the agents and agencies responsible for corporate governance, such as the CEO, the Independent Directors, the Board of Directors, and the Chairman of the Board of Directors. In other words, the mission of company executives is to create a system in which actions and results can be obtained that lead the way to the results sought by the market and society.

This Year's Activities

After many years of conducting the Association's activities, we have found that, in order to reform corporate governance, it is an essential requirement that the CEO and top management, promotes reform with a strong will. At the same time, the application of strong pressure from the capital markets, and from each of independent directors, being fully aware of their own role, any reform will not work unless there is interaction between them to achieve their goals.

For the Japan Association of Corporate Directors too, this fiscal year is the time to explore the next stage of corporate governance reform. We aim to publish two reports to discuss with our many members, and to explain to them in an easily understandable way, the roles and activities of the CEO and independent directors. We hope that these reports will serve as a reference for company executives and will lead to further improvement in the level of management competence and quality.

We also plan to issue an Association bulletin to promote the understanding of corporate governance for the next generation of company executives. We hope that this publication will assist in broadly disseminating the basics of corporate governance.

We want to work together with the Members of the Association to ensure that we can always continue to contribute to the growth of Japanese companies, while also always thinking about how we can help to ensure that the corporate governance function in Japanese companies will be able to move on from just the "appearance" to the next stage.