Outside Directors: Overstretched, Underinformed Board Members Not Sufficiently Monitoring Corporate Management

It has been pointed out that the system of outside directors, who monitor corporate management from an outsider’s perspective, is not functioning properly in many cases. Companies must not just increase the number of such directors to be in compliance with the rules; the quality of the system must also be improved.

In the outside director system, people who have not previously worked for a particular company serve as members of its board of directors, making decisions and supervising the firm from a position independent of the management team. Such directors are expected to monitor and supervise management without being bound by internal interests, thereby enhancing corporate value.

Former corporate executives, lawyers and university professors are often among those who become outside directors.

In Japan, the appointment of outside directors is encouraged under the Corporate Governance Code compiled in 2015 by the Financial Services Agency and the Tokyo Stock Exchange (TSE). Revisions introduced in 2021 require companies listed on the TSE’s Prime segment to have outside directors comprise at least one-third and, if necessary, a majority of their board members.

As a result, more than 90% of the companies listed on the Prime segment currently meet the one-third or more requirement. Progress has been made in terms of form, but it is difficult to say that the hoped-for benefits have been sufficiently realized.

Fraud involving product quality data has been exposed at Mitsubishi Electric Corp., which had a former vice foreign minister and a former prosecutor general among its outside directors.

Mizuho Financial Group, Inc. failed to prevent a series of serious system glitches despite having six outside directors, including former presidents of major companies, among its 13 board members.

This proves that simply bringing in prominent personnel as outside directors is not enough to enhance monitoring and supervision.

According to a survey by a private bank, more than 20% of people who serve as outside directors do so concurrently for at least three firms. This is probably because many companies rushed to appoint outside directors to meet the requirements of the code. It is difficult for outside directors to monitor and provide advice when they hold such a post for many companies at the same time. There are said to be cases in which directors agree with a company’s policies without question.

Sometimes they also find it difficult to give their opinions because they do not know the details of the company’s business operations.

Without a system to regularly provide accurate management information to outside directors, there is no point in having them. Moreover, it is even more difficult for them to fulfill their role if they serve several companies at the same time.

The Economy, Trade and Industry Ministry recommends training in the competencies required for outsider directors. This is aimed at enhancing their knowledge in the areas of corporate finance and information technology. It is hoped that each company will make efforts to expand its training programs.

To enhance diversity and stimulate debate, it is necessary to increase the number of female board members. However, the percentage of female outside directors who concurrently serve multiple companies is said to far exceed that of male outside directors.

This is probably because there are not enough human resources available, due to the delay in appointing women to executive posts in the corporate sector. Human resource development needs to be strengthened for women in corporate management.

(From The Yomiuri Shimbun, Oct. 1, 2023)