Outside directors

Requirement could help improve corporate governance

As corporate scandals keep happening one after another, will reforms lead to improved governance at Japanese companies? The Legislative Council has submitted to Justice Minister Takashi Yamashita a report outlining proposed revisions to the Companies Law. The revised law would require large companies to have at least one outside director. This rule would apply to listed companies and also to large unlisted companies.

The government aims to soon submit a bill to revise this law to the Diet. The intention of adding a third-party perspective to a management lineup to boost a company’s oversight function is reasonable.

Ninety-eight percent of listed companies already have an outside director. Legally obliging companies to have an outside director appears to be designed to demonstrate that Japanese firms place strong emphasis on strengthening their governance.

However, as epitomized by the accounting scandal that rocked Toshiba Corp., many companies become engulfed by scandal even if they do have outside directors. There is no point in merely reshaping the structure. It is vital that they boost the corporate value of their company. They must work hard at running the company by taking a long-term view.

An outside director’s role is to present a precise management strategy from an objective perspective. If mistakes are made in business decisions or serious wrongdoing occurs, they must strictly demand that corrective steps be taken.

Securing human resources possessing the proper insight and ability is a challenge. Many outside directors hold posts concurrently at several companies. This could reduce their ability to maintain oversight of all the companies at which they serve. Companies should try all possible means to secure a broad range of human resources.

It also is essential to prepare an environment in which outside directors can easily demonstrate their abilities.

Complaints commonly made by outside directors include that there are too many issues that the board of directors has to handle, and not enough essential information is provided. Companies also must strive to improve on these points.

The council’s outline also included proposals to have companies disclose more information pertaining to executive remuneration. Companies will have to show details including an overview of such remuneration and the reasons behind deciding the amount paid. These steps, which make it easier for shareholders to decide if such pay is appropriate, should be welcomed.

At the same time, a structure that boosts the transparency of the decision-making process will become crucial.

At Nissan Motor Co., the hefty compensation paid to the company’s former top boss has developed into a criminal case. Proper rules for determining how business performance and an executive’s level of contribution to the company should be reflected in their pay need to be set up.

One idea might be for outside directors to form a “remuneration committee” that decides the pay given to executives.

The outline also spelled out limits on the rights of shareholders to make proposals.

The revised law would restrict the number of proposals a single shareholder can make at a shareholder meeting to a maximum of 10. A company would be able to reject any inappropriate proposals, such as those that are defamatory.

This decision was made because shareholders who make proposals completely unrelated to improving a company’s management hinder constructive discussions at shareholder meetings. Accordingly, some restrictions were unavoidable.

(From The Yomiuri Shimbun, Feb. 15, 2019)