1. Current Standard of Corporate Governance in Japan
Submitted by-
Group 3:
Advait Bhobe
Chandrashekhar Jindal
Kanumuri Rajshekhar
Raunak Vasandani
Sangram Korekar
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2. Introduction -
Corporate Governance is "the system by which companies are directed and controlled".] It
involves regulatory and market mechanisms, and the roles and relationships between a
company’s management, its board, its shareholders and other stakeholders and the goals
for which the corporation is governed. In contemporary business corporations, the main
external stakeholder groups are shareholders, debt holders, trade creditors, suppliers,
customers and communities affected by the corporation's activities. Internal stakeholders
are the board of directors, executives and other employees.
The word for Corporate Governance in Japan is called as zaibatsu. The corporate
governance of Japan dates back to the 19th century, much of which was propelled by the
formation of the Meiji Restoration in 1866 by the Japanese government, the same time
when the world entered the Industrial Revolution. These formations were
termed zaibatsu. Prior to the war, Japan remained dominated by four major zaibatsu:
Mitsubishi, Sumitomo, Yasuda and Mitsui. They focused on steel, banking, international
trading and various other key sectors in the economy, all of which was controlled by
a holding company. Apart from this, they remained in close connection to influential banks
that provided funding to their various projects.
The prototypical keiretsu appeared in Japan during the "economic miracle" following World
War II. Before Japan's surrender, Japanese industry was controlled by large family-
controlled vertical monopolies called zaibatsu. Under this system, large industrial
corporations paved the way for banks and trading companies to sit on top of the
organizational pyramid controlling all financial operations and distribution of goods.
A recent wave of corporate scandals sweeping Japan has again highlighted poor governance
standards there. For long-time Japan watchers, the sense of "déjà vu all over again" is truly
disturbing. Why is it that Japan hasn't been able to fix rules that have been broken for so
long?
Consider the recent lapses. Most notably at Olympus, the chairman who resigned last week
allegedly engineered deals in which the company, for reasons as yet unknown, grossly
overpaid in a series of mysteriously connected M&A transactions, and then fired the
foreign-born chief executive when he tried to bring accountability to bear.
Daio Paper is suing its former chairman for allegedly "borrowing" $140 million from
subsidiaries without permission, which is a classic hand-in-the-cookie-jar scandal in a
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3. Japanese founder-family led company. The board was not even asked to approve the 26-
odd loans that were made.
Tokyo Electric Power Co., or Tepco, which is in the midst of receiving a bailout after board
oversight and risk management lapses contributed to a dangerous and costly disaster at the
Fukushima Daiichi nuclear plant. Kyushu Electric is embroiled in a political influence scandal
in which managers allegedly endangered the firm's reputation by trying to trump up the
appearance of support for the company's desire to restart its nuclear power plants after a
government-imposed shutdown.
The basic elements of these scandals are all too familiar: a toxic mix of lack of transparency,
accountability, and independence on boards. Japan has been down this road many, many
times before. Why has nothing changed?
The problem is that Japan has never seriously attempted a major overhaul of its corporate
governance system for all listed companies. Structural gaps in the Company Law leave
Japan Inc. without essential legal infrastructure and principles that are already in place
elsewhere. This is exacerbated by a lack of training for board members and executives
about how to enforce the existing standards that do exist.
Tokyo has spent the past 20 months considering changes to the Company Law "to improve
governance." However, the proposals so far drafted by the Ministry of Justice's advisory
committee fall far short of achieving this goal. What is missing?
First and foremost, the Company Law needs for the first time to include a definition and
role of "independent outside director," and do so in a way that will enable outside voices
on boards to be effective. Currently there is no legal definition of "independent director."
There is only "outside director," a term interpreted simply to mean anyone who has never
worked for the company. That narrow concept doesn't capture many people who might be
too close to management to be truly independent.
Second, the Company Law needs to strengthen the role of independent directors by
requiring a minimum number. It should also require committees of independent directors
to take charge of clearly defined matters, such as self-dealing transactions, investigations or
pricing of management buy-out deals, where the chance of management self-dealing is
high.
Such fairly simple reforms could have averted some of the recent scandals, or at least
hastened their exposure and accelerated the recovery of corporate credibility so as to cut
down on damaging uncertainty for investors.
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4. At Olympus, under the current law there was no legal mechanism for the board to handle
the allegations of impropriety that former chief executive Michael Woodford raised when
he first disclosed the chairman's suspect dealings. Under corporate law in most places,
independent directors already sitting on the board would have immediately formed a
special committee that was legally authorized to investigate. It would have been harder for
the chairman's personal irritation to push Mr. Woodford out of the company.
Instead, the company thrashed around for three weeks forming a "third-party committee"
comprising persons, however reputable, with no legal duties, liabilities or investigation
rights. This is because they are not board members.
When executives know that they can be immediately investigated and fired by neutral
outsider committees for gross incompetence, malfeasance and lack of transparency, slack
company habits no longer pass muster and fewer scandals occur. If this sort of protection
had existed in Japanese law already, it is unlikely that some of the recent problems would
have occurred at all, or in the value-destroying way they did.
In part, this would be due to the diligence and ethics of Japanese employees. Internal
whistleblowers at Olympus and Daio (and possibly, Tepco) would have probably given
information to committees of independent directors earlier, and these committees, which
would have had teeth, could have acted earlier. Similarly, Kyushu Electric would not have
been able to excise the portions of the report by its "third-party committee" that it found
inconvenient.
Improving governance will not simply be a matter of changing the law, however. Japan Inc
and Japan more broadly, needs an update in thinking on governance issues.
Part of the problem is political. Although the current Democratic Party of Japan government
is less business-friendly than the long-ruling Liberal Democratic Party before it, policy
makers and the media still buy into a reflexive attitude that what's good for Japanese
executives is good for their companies, and what's good for companies is good for Japan.
Policy makers need to be much less deferential to corporations on governance issues. In
this respect, the DPJ needs to push the Justice Ministry to move forward with meaningful
governance reforms despite industry reluctance.
In tandem with that, citizens need to understand that governance failures are not a matter
of one bad company here and there, but rather arise from structural and systemic
weaknesses. Domestic investors in particular should demand better governance instead of
assuming that "what Japanese managers want is probably right."
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5. Investors have lost $46 billion on Olympus, Daio, Kyushu Electric and Tepco combined this
year, not to mention other scandals over the years. Bad corporate governance is a costly
mistake Japan can ill afford, and a growing embarrassment for a country that deserves far
better.
How does Japan's situation differ from other economies?
According to the Tokyo-based Japan Association of Corporate Directors, whose aim is to
improve corporate governance, only 35 percent of the companies listed on the first section
of the Tokyo Stock Exchange have outside directors, with 1.8 for any given firm.
Outside directors are supposed to represent shareholders' interests, not the company's.
But the legal system does not guarantee that because the Company Law does not prohibit a
company from hiring an "outside" director who worked for the parent company or its
affiliates.
There are considerably fewer outside directors in Japan than at corporations in other
developed countries. The United States, France and Australia, for example, require that
outside directors at listed companies make up more than half of their entire boards.
Takeyuki Ishida, vice president of Institutional Shareholder Services K.K., a U.S.-based
corporate governance solution provider, said when he goes abroad and tells foreigners
about the lack of outside directors in Japanese companies, "our conversation stops for a
moment" because they are shocked.
"It's like people who are taking exams are grading the exams by themselves," he said.
Japan’s legal reform undertaken during the 1990s and on is massive and covers many areas.
The legal reforms that affect business activities include: reforms in the legal and
institutional
Practices in the areas of banking, corporate governance, capital markets and financial
Instruments and anti-monopoly (anti-trust) laws.
A significant number of new regulations and laws in corporate governance have been
Proposed and implemented throughout the 1990s and the early 2000s. Many of these
Changes will have a major impact on the corporate governance practices of many Japanese
Firms. For this reason it is noteworthy that these changes in the legal settings of Japanese
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6. Corporate governance took place so promptly.
It is generally agreed that the reason for this prompt acceptance of the major proposed
Changes in corporate governance practices is that the problems with the post-second
World
War (WWII) bank-based corporate governance mechanisms prevailing in Japan until the
Early 1990s were among the major causes of demise of many Japanese corporations.
Policy issues
Japan’s post-WWII bank-based corporate governance system was thought to be broadly
Consistent and in equilibrium with:
(I)Japanese societal norms;
(ii) Long-term management practices including employment and industrial
Relations practices;
(iii) Long-term practices in industrial organization;
(iv) Anti-trust (anti-monopoly) law and related practices; and
(v) Other legal and institutional practices including government practices.
(1)Will Japan’s new corporate governance system, after selective adaptation, be?
Compatible with (i)-(v) above, which themselves will be evolving over time?
Potential inconsistencies / dysfunctionality, if any, might lead to the loss in economic
Efficiency.
(2)On the other hand, successful adaptation may lead to efficiency gains.
How much degrees of freedom do Japanese firms have in designing their new corporate
Governance system under the revised legal regime?
Improvement in Japan’s Corporate Governance-
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7. In 2008 Olympus bought Gyrus, a British company, for the equivalent of US$2.2 billion. In
connection with this transaction, it paid an advisory fee of US$687 million to a firm
incorporated in the Cayman Islands and another in New York — this advisory fee was more
than 30 percent of the purchase price rather than the usual advisory fee of about 1 percent.
This was red flag no. 1. The ultimate owners of these advisory firms are still unknown — a
more alarming red flag no. 2. Michael Woodford, a British national and 30-year veteran of
the company, was fired as Olympus CEO on 14 October after he began investigating about
US$1.3 billion in acquisition write-downs and the aforementioned advisory fees related to
takeovers that neither he nor a forensic accounting firm he hired could explain. Screaming
red flag no. 3.
According to reports, the Olympus board voted unanimously at a 10-minute meeting to
jettison Mr. Woodford, citing “difference of management style.”
Mr. Woodford, in turn, challenged Olympus Chairman and President Tsuyoshi Kikukawa and
other executives to explain the transactions. He also made public a
PricewaterhouseCoopers report he commissioned that said the company may face
regulatory and legal scrutiny because of the payments made in the acquisition of U.K.-
based Gyrus.
Continuing Controversy-
Things have begun to develop quickly, as just last week Olympus shares surged following
the resignation of Kikukawa amid the growing scandal. Kikukawa’s resignation did not
address the payment of fees of more than US$720 million of write-downs within 12 months
of making three other acquisitions.
Japanese, British, and American authorities are now investigating these acquisitions, too.
The company has established a committee to examine the deals in question. Because this
committee will be made up of directors who joined the board after the deals in question,
some investors are questioning the independence of these committee members, as they
have been appointed by Olympus to investigate Olympus.
Corporate governance continues to be a challenge in Japan. According to the corporate
governance rating firm GMI, the country ranks at the low end of league tables in
governance, behind regional rivals Hong Kong, Singapore, and China. Currently in Japan,
there is no requirement for independent directors on boards, and many corporate boards
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8. are filled with company insiders. Governance and compensation committees are a novelty,
and nearly all annual meetings are held during the same week in June, making it nearly
impossible for interested investors to constructively dialogue with managers and boards.
Positive Developments for the Future-
There is, however, reason to believe that things may be improving. The Financial Services
Agency (FSA) in Japan has been discussing ways to improve corporate governance in order
to make the country more attractive to outside investment. Similarly, the Tokyo Stock
Exchange has also put governance reforms on the agenda. Finally, there are efforts already
underway by a select group in the Japanese House of Councillors, in conjunction with the
Japanese Independent Directors Network, to improve the situation, though they admit it
will be several years before any changes are apparent.
With regards to Olympus, a senior executive of the Tokyo Stock Exchange recently sent a
strong signal when he suggested the possibility of a delisting if it was found that the
company had seriously falsified information. Also, according to recent reports, some of
Olympus’s largest shareholders, including Nippon Life, which holds 8 percent of Olympus’
shares, have demanded more disclosure.
Kabushiki Gaisha –
Kabushiki Gaisha is a type Business Corporation under Japanese Law.
Formation-
A Kabushiki Gaisha was started with capital as low as ¥1, making the total cost of a K.K.
incorporation approximately ¥240,000 (about US$2,500) in taxes and notarization fees.
Under the old Commercial Code, a K.K. required starting capital of ¥10 million (about
US$105,000); a lower capital requirement was later instituted, but corporations with under
¥3 million in assets were barred from issuing dividends and companies were required to
increase their capital to ¥10 million within five years of formation.
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9. The main steps in incorporation are the following:
Preparation and notarization of article of associations-
Receipt of either directly or through an offerings
The incorporation of a K.K. is carried out by one or more incorporators, sometimes referred
to as "promoters"). Although seven incorporators were required as recently as the 1980s, a
K.K. now only needs one incorporator, which may be an individual or a corporation. If there
are multiple incorporators, they must sign a partnership agreement before incorporating
the company.
Board of Directors-
Under present law, a K.K. must have a board of directors consisting of at least three
individuals. Directors have a statutory term of office of two years, and auditors have a term
of four years. Close companies can exist with only one director, with no statutory term of
office.
At least one director is designated as a representative director, holds the corporate seal
and is empowered to represent the company in transactions. The representative director
must "report" to the board of directors every three months; the exact meaning of this
statutory provision is unclear, but some legal scholars interpret it to mean that the board
must meet every three months. At least one director and one representative director must
be a resident of Japan.
Directors are agents of the shareholders, and the representative director is a mandatory of
the board. Any action outside of these mandates is considered a breach of mandatory duty.
Auditing & Reporting-
Every K.K. with multiple directors must have at least one statutory auditor. Statutory
auditor report to the shareholders, and are empowered to demand financial and
operational reports from the directors.
K.K.s with capital of over ¥500m, liabilities of over ¥2bn and/or publicly traded securities
are required to have three statutory auditors, and must also have an annual audit
performed by an outside CPA. Public K.K.s must also file securities law reports with the
Ministry of Finance.
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10. Under the new Company Law, public and other non-close K.K.s may either have a statutory
auditor, or a nominating committee, auditing committee and compensation committee
structure similar to that of American public corporations.
Close K.K.s may also have a single person serving as director and statutory auditor,
regardless of capital or liabilities.
A statutory auditor may be any person who is not an employee or director of the company.
In practice, the position is often filled by a very senior employee close to retirement, or by
an outside attorney or accountant.
Officers–
Japanese law does not designate any corporate officer positions. Most Japanese-owned
kabushiki Gaisha do not have "officers" per se, but are directly managed by the directors,
one of whom generally has the title of president. The Japanese equivalent of a
corporate vice president is a department chief. Traditionally, under the lifetime
employment system, directors and department chiefs begin their careers as line employees
of the company and work their way up the management hierarchy over time. This is not the
case in most foreign-owned companies in Japan, and some native companies have also
abandoned this system in recent years in favour of encouraging more lateral movement in
management.
Corporate officers often have the legal title of shihainin, which makes them authorized
representatives of the corporation at a particular place of business, in addition to a
common-use title.
Rules of Board of Directors-
Objectives- The rules provide for the matter relating to Board of Directors.
Convocation- the Board meeting should be convened by Chair of Board. Notices regarding
board meeting has to be convened 3 days prior to the meeting stating the date, timing &
agenda of the meeting to each & every member of the meeting.
Holdings of the meetings- Board meetings shall be conducted once within 3 months. The
director should not exercise voting rights.
Attendance by the people concern- The Corporate officers should attend the meetings &
express their views & concerns.
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11. Minutes- The minutes should be made after every meeting & summary of the meetings
should be written accordingly.
3) Corporate Governance of Yamaha –
Yamaha has six directors, including three outside directors. In order to accelerate decision-
making by the Board of Directors and enhance supervisory functions. Outside directors also
act as members of the Corporate Governance Committees and serve to ensure
transparency of management decision-making. In principle, the Board convenes once
monthly, and is responsible for the Group's management functions. This includes proposing
Group strategy while monitoring and directing the execution of business carried out by
each division. In order to clarify responsibilities, directors are appointed for a term of one
year.
Yamaha also employs an executive officer system with the aim of strengthening
consolidated Group management and the business execution functions of divisions. As of
June 28, 2012, the executive officer system comprises 15 executive officers, including two
managing executive officers, who are assigned to business or administrative divisions
dealing with important management issues. The executive officers support the President,
the chief officer in charge of business execution. Managing executive officers, who serve
concurrently as Company directors, are assigned to oversee the operation of businesses
and administrative divisions, in accordance with the importance of these responsibilities. In
addition, five senior executive officers oversee the entire Company organization. As group
managers, they are responsible for the performance of key divisions within the Company,
and manage and direct in a manner appropriate for bringing the functions of each group to
the fore.
Audit system of Yamaha-
Yamaha is a company with a Board of Auditors as defined under Japanese law, and has
worked to enhance governance functions by introducing an executive officer system, as
well as by setting up Corporate Governance Committees and an internal control system.
These actions in conjunction with consistent audits of the Company's daily operations
conducted by Yamaha's system of full-time auditors raise the effective of governance.
As of June 28, 2012, Yamaha has four auditors, including two outside auditors. In principle,
the Board of Auditors convenes once monthly. Based on audit plans, auditors periodically
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12. perform comprehensive audits of all divisions and Group companies, and participate in
Board of Directors' meetings and other important meetings such as management councils.
Yamaha has also established a Corporate Auditors' Office (with one staff member as of June
24, 2011) dedicated to supporting auditors. This system helps ensure an environment
conducive for performing effective audits.
With respect to accounting audits, the suitability of such audits is determined based on
periodic progress reports from the accounting auditors of their audits of the Company's
financial statements. The Internal Auditing Division (10 staff members as of June 28, 2012)
is under the direct control of the President and Representative Director. Its role is to closely
examine and evaluate systems pertaining to management and operations, as well as
operational execution, for all management activities undertaken by the Company and
Group companies from the perspective of legal compliance and rationality. Evaluation
results are then used to provide information for the formulation of suggestions and
proposals for rationalization and improvement. In parallel, Yamaha strives to boost audit
efficiency by encouraging close contact and coordination among corporate auditors and
accounting auditor
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13. References-
http://www.yamaha.com/about_yamaha/csr/commitments/system_governance/
http://www.eisai.com/company/boardmtg.html
http://en.wikipedia.org/wiki/Kabushiki_gaisha#Board_of_directors
http://www.economist.com/news/business/21565660-after-olympus-scandal-japan-inc-
wants-less-scrutiny-back-drawing-board
http://www.japantimes.co.jp/text/nn20120117i1.html
http://blogs.cfainstitute.org/marketintegrity/2011/11/04/corporate-governance-in-japan-
%E2%80%94-plenty-of-room-for-improvement/
http://online.wsj.com/article/SB10001424052970204394804577011501170286044.html
http://www.cjs-waseda.jp/research/2011symposium/papers/Nakamura_ppt.pdf
http://www.yamaha.com/about_yamaha/csr/commitments/system_governance/
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