Re-examining Corporate Governance in Japan.

(From Journal of Japanese Trade & Industry (JJTI))

Byline: Yanai Hiroyuki

Approaches by Specific Companies Apart from the legislated corporate governance reforms described above, a number of companies are voluntarily implementing their own governance reforms (reforms not required by law).

These voluntary corporate reforms focus mainly on the board of directors. The board of directors at Japanese companies, for example, has traditionally included dozens of board members, the majority of whom were also executive directors. Although these directors attend board meetings as representatives of their specific department, they lack a company-wide perspective on management. Moreover, with all board members in positions subordinate to the president, these boards of directors were criticized for not fulfilling their obligation to monitor the company president. An initial step in separating the execution and monitoring of management has been taken with the introduction of the "corporate executive officer system," which is designed to slim the board of directors and create a meeting structure under which constructive debate can take place. The position of "officer" at U.S. corporations has been adapted to suit Japan's distinctive corporate environment. Data related to the corporate executive officer system indicates a steady rise in its introduction. Although Sony Corp. was the only company to introduce this system in 1997, this figure subsequently grew to 19 companies in 1998, 180 in 1999, 279 in 2000, and 656 in 2001. (Figure 1) With the phrase "corporate executive officer" adopted by the revision of the Commercial Code, among other reasons, to provide the corporate executive officer system being introduced with legal backing, we have a prime example of the business sector setting the pace and affecting legal change. Moreover, a significant number of corporations have voluntarily established nominating committees, compensation committees and other subordinate bodies that report to the board of directors. These voluntary committees differ from the three mandatory committees required at companies electing to establish committees to monitor execution in that they lack the authority to make final human resource and compensation decisions. These voluntary committees are merely responsible for preparing proposals that are then submitted to the board of directors. (This lack of authority is rooted in the fact that, prior to the revision of the Commercial Code, the board of directors was vested with the final decision-making power to draft the proposals submitted at the shareholders' meetings with regard to human resource planning, the allotment of compensation for individual board members and other matters.) A number of companies have also moved beyond the corporate executive officer and committee systems and are, in fact, outpacing the legislative system in their efforts to introduce U.S.-style boards of directors.

Hoya Corp., for instance, is a corporate leader in this respect. This corporation has already instituted a board of six directors of whom three are independent directors. With half of the board comprised of independent directors, the Hoya president can be removed from office in a crisis situation on the edict of the independent members alone. While the form taken may not yet be clear, the number of companies establishing voluntary committees to discuss directors' human resource issues (under a variety of names including the "Nominating Committee," "Nominating and Compensation Committee" and "Executive Human Resource Committee") under the auspices of, or independent from the board of directors is expected to climb considerably. The aim of those companies is to create a framework under which the views of corporate outsiders are reflected in the decision-making process.

Beyond restructuring the board of directors itself, many companies are also focusing on restructuring the board of directors compensation system. An evident corporate trend away from the conventional system based on fixed salaries to one that rewards individual performance by increasing the amount of compensation linked to concrete ...