‘Growth-oriented corporate governance’ and the roles of outside/independent directors in Japan

Japan has reformed its corporate governance system in recent years, with a particular focus on the role of outside/independent directors. Roughly stated, an “outside director” under the Japanese Companies Act is a director who is neither employed by the company, its subsidiary nor its parent company. The 2014 Reform of the Companies Act introduced a “comply or explain” rule for listed companies regarding appointment of one “outside director”. The 2015 Japanese Corporate Governance Code also introduced a similar rule regarding appointment of two or more “independent” directors, which are defined by the Listing Rules of the Tokyo Stock Exchange as “outside directors who are unlikely to have conflicts of interest with general shareholders”. For example, a director who is appointed by the main bank of the company can be an “outside director” but may not qualify as an “independent director”.

These requirements turned out to be quite effective in nudging the majority of Japanese listed companies to “comply”. Within the companies listed in the First Section of Tokyo Stock Exchange, which is the top-tier market in Japan, the ratio of those appointing one or more outside directors jumped from 48.5% in 2010 to 55.4% in 2012, 74.3% in 2014, and 98.8% in 2016. 

Though it remains quite rare for Japanese companies to appoint enough outside/independent directors to have them constitute the majority of the boards, it may be said that, after a long period of resistance against the appointment of outside/independent directors, Japan finally modestly started to follow the global corporate governance trend of the so-called “monitoring model” proposed by Professor Melvin Eisenberg in 1976. 

At the same time, such a focus of the Japanese reforms on outside/independent directors may seem to be a little out of synchronisation from an international perspective, as discussions in many developed countries after the Financial Crisis of 2007-2008 have tended to emphasize the shortcomings of too much board independence due to informational asymmetry and a lack of adequate incentives (see for example, Wolf-Georg Ringe, Independent Directors: After the Crisis, European Business Organization Law Review, 14 (2013), 401). To put it differently, the background of the recent Japanese reforms is different from the reforms in other jurisdictions. In my recent paper “Recent Boardroom Reforms in Japan and the Roles of Outside/Independent Directors”, which is available at SSRN (https://ssrn.com/abstract=3272634), I explain that unlike many other prior corporate governance reforms around the world, the recent reforms in Japan were not made in response to major corporate scandals. Rather, the impetus came from the emphasis of the current Abe administration on corporate governance as a key to “revitalizing” the Japanese economy by increasing corporate value. This approach is dubbed “seme no gabanansu”, which can be translated as “growth-oriented governance” or more literally “aggressive governance”. 

Interestingly, the related discussions in Japan emphasize different roles of outside/independent directors in this regard. On the one hand, the 2014 Companies Act Reform focuses on their role in appointment, evaluation and dismissal of the management, which can be traced back to the monitoring model by Professor Eisenberg. On the other hand, the 2015 Japanese Corporate Governance Code emphasizes their role in examining the quality of investment proposals by the management, in accordance with the Code’s general policy of promoting more risk-taking. In addition, some commentators expect outside/independent directors to represent the interest of shareholders in the boardroom and to function as a barrier to isolate the management from the interests of key employees.

Admittedly, these roles do not necessarily contradict with each other, and it is possible that outside/independent directors perform all of them. It is, however, important to recognize their differences, and to decide on which to focus, when one is to evaluate whether recent reforms have achieved their intended goal(s). 

Another implication from the findings above is that, in addition to inter-jurisdictional difference of the expected roles of outside/independent directors that can be attributed to structural factors such as share-ownership, there also could be intra-jurisdictional divergence deriving from different points of focus on what these directors should actually do. 

Gen Goto is Associate Professor of Law at the University of Tokyo, Graduate Schools for Law and Politics.