Nicholas Benes writes about significant steps forward in Japanese corporate governance:
The good news is that Japan’s corporate governance code set a base that can be improved upon and has given a firm foothold to the aspirational concept of ‘best practices’ in Japan.This by itself is historic, especially when you consider that some of the practices were totally new here. For instance, after I proposed the concept to the Financial Services Agency, a Japanese word had to be invented for ‘lead independent director’. Similarly, at the time, few here would have understood what was meant by ‘executive sessions’ or ‘board evaluation’.
Today, Japan has made significant progress:About 80 per cent of companies listed on the first level of the Tokyo Stock Exchange (TSE1) now have two or more independent directors (INEDs) on their boards, according to ascertainable criteria for ‘independence’. This is almost four times the percentage recorded only two years ago. At almost 23 per cent of TSE1-listed firms, INEDs make up one-third or more of the board.
Approximately 40 per cent of TSE1 companies now have a voluntary ‘nominations committee’ of some form, a level which is eight times as high as it was 2014. Voluntary compensation committees are also increasing in number.
About one-fourth of TSE-1 companies claim to fully comply with the code and 90 per cent have implemented at least 90 per cent of its 73 provisions. There is now vastly more disclosed information about actual governance practices and policies at each company. This is because the code not only requires ‘comply or explain’ statements, but also (irrespective of that) disclosure about each company’s policy on 11 different topics. Even when such disclosure is shoddy, at least one can confirm that those companies lack rigor and substance. Investors now have so much to shoot darts at that my organisation has constructed a special search engine.About 40 per cent of TSE1 companies have some form of voluntary ‘corporate governance guidelines’, although that is not required by the code. Even if many of them need more detail, this self-disciplining concept has taken hold. (I proposed it to Japan’s Financial Services Agency for the code, but to no avail; but the Board Director Training Institute gave several free seminars explaining why ‘policies’ have to actually exist in order to be ‘disclosed’.)
Most Japanese companies are more open to engagement by investors than before, a trend that is supported by the stewardship code. The ecosystem is improving.
He cautions, however:
The reforms were put in place so fast that companies need more time to understand what the principles of the code require in terms of detailed practices and mindset. At the same time, investors also need to learn how to leverage the code’s principles, by considering with experts how its principles can be reflected in granular procedures in the context of Japanese law and telling companies exactly what they expect. There’s actually a lot to mine in the code.