Doing Things Right :

Corporate governance in
japan
 CORPORATE GOVERNANCE : MEANING
“Corporate Governance is the system by which companies are
directed and controlled”
---- Cadbury Committee (U.K)

“Fundamental objective of corporate governance is the

‘enhancement of the long-term value while at the same time
protecting the interests of other stakeholders.”
---- Kumar Mangalam Birla Committee (India)
 CORPORATE GOVERNANCE
Corporate Governance – The mechanism by which interested parties in a
corporation interact with each other and promote their interests.

Corporate governance is generally defined as the framework for disciplining

corporate activities.

Corporate governance has become one of the major international issues that have
succeeded in attracting a good deal of public interest in recent years

especially since the recent spate of “world famous” scandalous corporate failures.

Today, it is considered that corporate governance plays an important role in the

economic health of corporations and society in general.

Improving corporate governance is a systematic project, it is necessary to the

internal governance and external governance of the ways multi-pronged

.
 Models of corporate governance
The Anglo-US model

The Anglo-US model is characterized by share ownership of

individual, and increasingly institutional, investors not affiliated
with the corporation (known as outside shareholders or
“outsiders”);
A well-developed legal framework defining the rights and
responsibilities of three key players, namely management,
directors and shareholders; and a comparatively uncomplicated
procedure for interaction between shareholder and corporation
as well as among shareholders during or outside the AGM.
The Anglo-US model governs corporations in the UK, the US,
Australia, Canada, New Zealand and several other countries.
The German model
• Governs German and Austrian corporations.
• Some elements also apply in the Netherlands and
Scandinavia.
• Some corporations in France and Belgium have
recently introduced some elements.
• Key players- i) German banks.
ii) Corporate shareholders.
• Similar to the Japanese system, banks usually play a
multi-faceted role as shareholder, lender, issuer of
both equity and debt, depository and voting agent at
AGMs.
• Shareholders do not possess the authority to alter
the size or composition of the supervisory board.
• These are determined by law.
The Japanese model
• Based on codes, regulations and laws.
• Characterized by a high level of stock ownership by affiliated banks
and companies;
• a banking system characterized by strong, long-term links between
bank and corporation;
• a legal, public policy and industrial policy framework designed to
support and promote “keiretsu”;
• Boards of directors composed almost solely of insiders;
• Comparatively low level of input of outside shareholders, caused and
exacerbated by complicated procedures for exercising shareholders’
votes.
• Many-sided, centering around a main bank and a financial/industrial
network or keiretsu.
• The main bank system and the keiretsu are two different.
• Almost all Japanese corporations have a close relationship with a main
bank.
• The bank provides its corporate client with loans as well as services
related to bond issues, equity issues, settlement accounts, and related
consulting services.
• The main bank is generally a major shareholder in the corporation
 “Keiretsu”” Pros:

• Parent company (main banks) - Reduce corporate agency

act as administrator & costs
intervene in cases of financial - Ensure returns to banks
distress - Easier for firm to obtain funds
• Banks allowed to hold equity
- Below-market lending rates
positions in companies
• Largely self-governing
Cons:
• High opacity and resistant to
change
• Perform best when there are - No price signal to guide
little capital relative to decisions
opportunities and when - Potential conflicts of interest
contractibility is low - Costly misallocation of
resources
 The Japanese corporate governance
• The Tokyo Stock Exchange (TSE) issued Principles of Corporate Governance for Listed
Companies in 2004 which were revised in December 2009 and a new Company Law
came into force in May 2007, replacing provisions of the Commercial Code that relate to
companies.
• In response to the corporate governance scandals of 2007, the Japanese government
also introduced guidelines informally known as Japanese Sarbanes-Oxley or J-SOX
which became effective in April 2008.
• Biggest issue -lack of independence in the composition of boards of directors which are
largely dominated by management.
• Contrary to good corporate governance practices, a high proportion of company board
members are promoted from among employees. TSE published new rules in December
2009 relating to independent directors.
• Earlier, in September 2009 the TSE laid out its Listing System Improvement Action Plan
proposing at least one independent director or auditor and disclosure of names of the
independent director/auditor.
• In 2002, Japan amended provisions of the Commercial Code to allow companies to
choose between either keeping the traditional statutory auditor (kansayaku) system or
adopting a U.S.-style corporate governance system.
• In July 2005, Japan published the new Company Law No. 86, which replaces and
significantly modifies the provisions of the Commercial Code that relate to companies.
• The Company Law came fully into force in May 2007.
• Back in 2003, the International Monetary Fund's (IMF)
Financial System Stability Assessment (FSSA) had highlighted
that the corporate governance system in Japan was
characterized by a lack of shareholder activism, transparency,
and relatively few outside directors on corporate boards.
• The relatively small corporate bond market and extensive
cross-shareholding further impede structural change.
• The 2008 ACGA White Paper on Corporate Governance, a
collaborative effort with global institutional investors, notes
that "while a number of leading Japanese companies have
improved their corporate governance practices in recent
years, the system of governance in most Japanese listed
companies fail to meet the needs of stakeholders or the
nation." Japan's corporate governance structure is often
portrayed as a system of "stakeholder capitalism".
• Japan is ranked 35th among 39 nations rated in a 2009 survey
by Governance Metrics International (GMI), a corporate
governance research and rating firm,
• Main factors behind the poor ratings-attributed to the lack of
independent directors in the boardroom.
• AS Per the GMI survey, 96 % of Japanese companies rated by
GMI have a majority of non-independent directors on their
boards, 45 % have no independent directors at all and 30 %
comprise executive directors only.
• Japan scores 7.0 in the disclosure index against a regional
average of 5.1 and an OECD average of 5.9
• It scores 6.0 in the Director Liability Index against a regional
average of 4.6 and an OECD average of 5.0 and 8.0 in the
Shareholder Suits Index against a regional average of 6.3 and
an OECD average of 6.6
 Principle of corporate governance
• The Principles of Corporate Governance apply to listed
companies.
• However, with the recent development of forming a
group of companies through the use of a holding
company, etc., it is important for a listed company to
ensure corporate governance of not only the parent
company, but also the corporate group as a whole.
• Therefore, a listed company is required to make efforts
so that corporate governance functions effectively as a
corporate group as a whole.
• The following points, as Principles of Corporate
Governance, raise the issues to which all companies
should direct their attention, based on the expected
functions of corporate governance.
1.Rights of shareholders
• Corporate governance for listed companies should protect the rights
of shareholders.
• (1) Respect of shareholders’ basic rights
A. Respect of voting rights ,Development and improvement of an
environment in which shareholders exercise voting rights
appropriately; Development and improvement of an environment in
which shareholders are inclined to participate in general meetings of
shareholders; Mutual communication with shareholders at the
general meetings of shareholders;
B. Return of profit to shareholders
• (2) Due consideration to the infringement of rights of existing
shareholders
A. Enhanced disclosure of information to shareholders in situations
where specified shareholders have excessive control that is not in
proportion to the ownership ratio, and the rights of other
shareholders are substantially infringed.
B. Securing fair treatment of and enhanced information disclosure to
shareholders in cases where the ownership distribution of the
company is, or will be,
2. Equal treatment of shareholders
• Should ensure the equal treatment of all shareholders,
including minority and foreign shareholders.
• The equal treatment of all shareholders of the same class
in proportion to their equity interests is an important
element of corporate governance.
• Management, directors, auditors and controlling
shareholders may find opportunities to abuse their
positions to benefit themselves, and such activities are
certain to cause disadvantages to investors and minority
shareholders.
• The prohibition of abusive or fraudulent use of corporate
assets or insider information by parties closely related to
the company is an inevitable step to be taken both to
protect investors and to maintain their confidence in the
capital markets.
 3. Relationship with stakeholders in
corporate governance
• Should help create corporate value and jobs
through the establishment of smooth relationships
between the company and its stakeholders and
encourage further sound management of the
enterprise.
• Issues requiring attention:
1. Cultivation of a corporate culture that respects the
positions of stakeholders, and development of
internal systems therefore;
2. Timely and accurate disclosure to stakeholders of
material information relating to stakeholders, and
development of internal systems therefore
4. Disclosure and transparency
• Corporate governance for listed companies should ensure that timely and
accurate disclosure is conducted on all material matters including the
financial condition, performance results and ownership distribution.
• Listed companies shall be obliged to conduct timely and accurate
disclosure regarding corporate activities. Such disclosure is indispensable
for appropriate investor evaluation of enterprises in the market, and
concurrently for the appropriate exercising of voting rights by
shareholders..
• Issues requiring attention:
• Listed companies should direct their attention to the following issues in
order to conduct timely and accurate disclosure:
• Enhanced disclosure of quantitative information on financial conditions
and operating results and enhanced disclosure of qualitative
information that deepens the understanding of the management
conditions of companies by investors ;
• Securing opportunities for investors to access information equally and
easily;
• Development and improvement of internal systems to secure the
accuracy and promptness of disclosure.
 5. Responsibilities of Board of Directors, Auditors, Board of
Company Auditors, and other relevant group(s)
• Corporate governance for listed companies should enhance the
supervision of management by the Board of Directors, Auditors,
Board of Company Auditors, and other relevant group(s)( 1), and
ensure their accountability to shareholders.
• The legal framework or basis for corporate governance permits the
choice of a corporate auditors system or committees system.
• In either case, the Board of Directors, Auditors, Board of Company
Auditors, and other relevant group(s) should evaluate whether the
management (2) has been accurately and efficiently executing
business pursuant to their strategic guidance on strategies, and
prevent the occurrence of conflicts of interest between the
company and the management by reflecting on such evaluation
prior to the election or discharge of management or the execution
of decisions on compensation, and thereby fulfill their appropriate
supervision responsibilities.
 thank you