Govt mulls making outside directors mandatory

A government panel has proposed revising the Companies Law to make it mandatory for major firms to appoint at least one outside director.

The Legislative Council, an advisory panel to the justice minister, finalized its outline for revising the Companies Law and three other laws at its general meeting on Feb. 14 and submitted it to Justice Minister Takashi Yamashita.

The government will submit a bill to revise the Companies Law to an extraordinary Diet session scheduled for autumn, with the aim of having the law take effect in 2020.

The latest proposal is aimed at strengthening companies’ ability to monitor their corporate management and corporate governance system.

According to the proposed outline, companies — both listed and unlisted — that meet all of the following conditions will be required to appoint at least one outside director:

■ Has a board of auditors and does not restrict share transfers

■ Has capital of at least ¥500 million or total liabilities of at least ¥20 billion

■ Is required to submit securities reports

The outline also includes the following recommendations:

■ The number of proposals made at shareholders meetings should be capped at 10 per shareholder

■ The board of directors should decide on and disclose specific methods for determining board members’ pay

■ Minutes of shareholders meetings should be digitized

Currently, more than 90 percent of listed companies have already appointed external directors. However, the arrest of Carlos Ghosn, former chairman of Nissan Motor Co., has brought to light the failure of the automaker’s outside directors to detect acts of suspected misconduct.

In response, companies are being called upon to enhance the effectiveness of external directors.

Toshiba Corp., once regarded as a model of good corporate governance, was one of the first Japanese companies to appoint an external director.

However, the external directors failed to detect inappropriate accounting procedures in 2015 as well as huge losses in its U.S. nuclear power business the following year.

Some have pointed out that outside directors lack a thorough understanding of the financial situation of the company they are tasked with monitoring because they do not have access to enough inside information.

There is also a serious shortage of human resources capable of serving as outside directors.

According to ProNed Inc., a human resources consulting firm, only 30 percent of external directors for companies listed on the First Section of the Tokyo Stock Exchange have corporate management experience. Of the rest, 20 percent have worked for financial institutions; 20 percent are lawyers; 10 percent are former bureaucrats and 10 percent are academic experts.