Truly effective measures needed to reform corporate governance

To reform corporate governance and thereby improve the quality of management, it is not enough to set up mere formalities. Effective measures are essential to improve the transparency of management and prevent wrongdoing.

The Financial Services Agency and the Tokyo Stock Exchange have released a draft proposal to revise the Corporate Governance Code, which outlines the principles of conduct for listed companies. They plan to revise the code by June.

The main pillar of the revisions is increasing the number of independent outside directors who monitor management. This is not mandatory, but if a company chooses not to do so, it will be required to explain why to investors.

The code was compiled in 2015 with the aim of attracting foreign investment, and this will be the second time it has been revised. It will be important for companies themselves to make steady reforms based on the revised code.

Currently, the code stipulates that a listed company must appoint at least two independent outside directors. A new rule will require companies that are to be listed in the Prime section, which will replace the First Section of the TSE when the market is restructured next spring, to have at least one-third of their board be filled by independent outside directors, and it will recommend the appointment of a majority if necessary.

As it stands, about 60% of the companies on the First Section reportedly have at least one-third outside directors, and less than 10% have more than half. Companies need to hurry and take action for the transition to the Prime segment.

The role of outside directors is to evaluate the appropriateness of management decisions from an objective standpoint, unencumbered by internal ties, and to monitor management to deter and correct misconduct. It is important to increase the percentage of outside directors, but this must not end up as a numbers game.

At present, requests to serve as outside directors are primarily made to people who have experience serving as a company president, prominent lawyers and accountants, and there are many cases of people who serve at multiple companies concurrently.

The monitoring role of outside directors did not function well at Nissan Motor Co., where there were alleged irregularities over the executive remuneration for former Chairman Carlos Ghosn; at Japan Post Insurance Co., where inappropriate sales were rampant; or at Kansai Electric Power Co., where the issue of executives receiving money and gifts came to light.

It is said that in some cases, not much internal information is provided to outside directors. It is important to thoroughly share information especially by creating opportunities to exchange opinions with company executives on a daily basis. The authority and roles of outside directors must be clarified, and an environment created in which they can easily get involved in management.

A new rule will also emphasize addressing the issue of climate change. Many companies have already announced their reduction targets for carbon dioxide emissions and the risks of rising temperatures to their business, but investors are increasingly demanding greater disclosure in this regard.

Companies will be required to disclose information on the progress of climate change measures in accordance with international rules governing the disclosure of measures. The aim is to make it easier for investors to evaluate them. Information must be actively disseminated to attract funds.

— The original Japanese article appeared in The Yomiuri Shimbun on April 25, 2021.