Kaizen for corporate governance

Japanese equities

Kaizen for corporate governance

For a very long time, diversity has been the elephant in the boardroom as far as Japanese businesses are concerned -- but new national recommendations for corporate governance may be a catalyst for change.

Over the decades, a chronic lack of female and foreign directors and a distinct lack of appetite for change had been an unspoken, but enduring characteristic of Japan Inc.

Just recently though, the country has taken another significant step towards improving its corporate governance, including, among other things, renewed efforts to reform the very homogenous nature of Japan’s corporate leadership.

The Financial Services Agency in Japan has recently released the first update to its corporate governance code. Since its introduction over three years ago, the code has gone a long way to align interests between the country's shareholders and businesses. However, many long-term observers believe there is still much more that can be done to improve the image of corporate Japan and ultimately make its markets more palatable to foreign investors.

"Observers of corporate governance in Japan believe there is still much more that can be done"

For this reason, several of the key revisions in the code will be vital in fostering substantial change. The updated code pushes for reform in corporate leadership, calling for transparent and fair procedures on the appointment and dismissal of senior management, including CEOs.

On the key issue of outside directors, which is often an area of corporate lip service, companies are urged to go beyond the recommended two outside directors and appoint “a sufficient number” of independent directors. The new code explicitly encourages companies to consider “gender and international experience” and emphasises attracting more female and foreign management talent for director roles.

Cross shareholdings

On the practice of companies owning other companies’ shares – something which is historically very prevalent in Japan, the updated code again presses for greater change. While, the original code merely pushed companies to disclose their cross-shareholding policy, the new version urges disclosure of reductions to such holdings with banks and business partners, and an annual evaluation on whether each crossholding is still appropriate based on benefits and risks. In my opinion, this may well act as a significant catalyst for change, especially if it sparks a high approval rate for cross-shareholding related proposals. As with board diversity, we’ll be monitoring the changes ahead closely.