Chairman's Message 2020

Japan Association of Corporate Directors
Yoshihiko Miyauchi, Chairman

An Entirely Different Economic Environment

The COVID-19 outbreak that began early in 2020 has caused the GDPs of countries worldwide to plummet as companies were forced to shut down. This is an unprecedented situation. At this time, it is impossible to predict when this crisis will end. We must keep in mind the likelihood that global economic activity will not recover for a long time. Furthermore, even after COVID-19 winds down, economies and society will never return to what we were accustomed to before this crisis started.

Safety and the recovery of the economy are obviously the most urgent matters as this crisis continues. Japan became one of the world's most powerful economies because of benefits spanning many years of the country's culture of diligent work and spirit of cooperation. At this difficult time, we need to once again recognize that economic power incorporating the fulfillment of social responsibilities is at the heart of Japan's identity.

In the past and from now on, we must focus on building systems that stimulate innovation at every company in order to make Japan's economy even stronger. There is no doubt that corporate governance will continue to be a key element for accomplishing this goal.

Until now, corporate governance has been generally limited to only two perspectives. One is the negative oversight function in order to prevent fraudulent and other improper activities. The other is format changes like the election of independent outside directors and establishment of voluntary committees to advise the board of directors. But governance is much more than this. One of the most important issues is therefore the creation of corporate governance structures from a much broader perspective.

Activities by executives for rapid growth accompanied by positive pressure on the management team, mainly from independent directors, are very important, especially for companies that operate on a global scale. All companies must step up their activities in order to establish a proper and effective corporate governance framework that can contribute to medium and long-term growth.

Corporate governance until now

Japan has just completed its first decade following the end of the so-called "lost 20 years." Although many Japanese companies staged recoveries during this decade, their stature is still far from the dominant position that Japan had in the past. This is unacceptable. I believe that Japanese companies should use all of their strengths to end this situation and regain their prominent positions in global markets.

The leaders of countries worldwide are taking many actions in response to the COVID-19 crisis. But in some instances, there are doubts about the quality of this leadership. It has been a long time since the public has become aware on this scale of the critical importance of the roles of leaders in overseeing government initiatives during a crisis.

This is also true of corporate management. From now on, the board of directors must do everything possible to perform its true corporate governance functions. Directors need to select CEOs who are best suited for the current business climate and drive progress at companies by encouraging managers to take many actions. Furthermore, companies must go beyond conventional thinking of the past in order to adopt a more advanced mindset. Nomination committees that include independent directors and succession plans are becoming increasingly important as a result.

Some large companies that had a conservative view of corporate governance have embraced the stance that growth is the objective of governance and therefore made governance a core element of management. The establishment of governance frameworks where independent directors constantly oversee the performance of managers and managers focus on reaching targets is giving many companies excellent prospects for growth. This is a positive development. Companies using these governance frameworks are likely to contribute to the vitality of the entire Japanese economy.

The Japan Association of Corporate Directors (JACD) views corporate governance as a means of supporting the growth of companies. This is why the association has been increasing its knowledge involving laws, securities markets, investors, companies and many other fields.

Shifting from the conceptual to the practical level for activities involving the roles of managers and independent directors is particularly important. For example, what is the true role of director oversight? How should directors perform this oversight? What should managers use as their goals? Subjects like these need to be discussed and guidelines for behavior established. The JACD has been providing advice and assistance concerning these points since 2019.

The future of corporate governance

Corporate governance varies depending on the positioning of companies, how executives manage businesses and other characteristics of different countries. Some countries use corporate governance to keep executives under control and prevent unlawful activities. In Japan, for the time being, activities are needed that recognize corporate governance as a force for increasing the profitability and growth of companies.

From now on, companies have an obligation to determine ways to incorporate a broad spectrum of social responsibility in their activities as they aim for more earnings and growth. Most important is responsibilities based on the Sustainable Development Goals, which reflect environmental issues and the interests of employees and all other stakeholders.

After the COVID-19 crisis, executives at Japanese companies must implement bold reforms and innovations. This is why the roles of the executives who select and implement these actions will become increasingly important. Corporate governance is used for explanations of activities in a format that is easy to understand and for reaffirming that these measures are the right course of action. In addition, independent directors perform the function of using the perspective of markets in order to support a company's management team. Consequently, corporate governance will become a major ally of a company's executives too.

The COVID-19 crisis may force us to rethink our stance regarding corporate governance. Most of all, we need to examine the role of governance concerning the social responsibilities of companies. For example, should a mask company be allowed to earn large profits by selling masks at high prices? Should a company that makes drugs for treating COVID-19 be allowed to earn substantial profits? Is it acceptable for companies to lay off large numbers of employees? Another question is how much national governments should provide assistance to companies on the verge of bankruptcy because of a decrease in sales.

Medium to long-term growth has always been viewed as the objective of corporate governance. But now we are seeing the emergence of issues that cannot be solved by using this standpoint. The JACD needs to turn its attention to these types of issues as well. Discussions about achieving growth in the true sense cannot ignore these issues.

Natural disasters, pandemics and geopolitical risk are unavoidable in the future world. Japanese companies are very strong because of their experience overcoming a multitude of challenges, notably the difficult postwar recovery period. Challenging times are precisely when differences in leadership skills become most evident. Executives of Japanese companies should regard difficulties as opportunities for more progress. To accomplish this progress, companies must make corporate governance part of an infrastructure for growth and fully utilize this governance.

Thank you for your support and understanding as the JACD continues to perform numerous activities based on the positions and goals I have discussed in this message.