Towards a Full Reform of Japan’s Governance Framework

(Reply to comment made yesterday.) Your idea* is a good one, but I believe that a much bolder reform of the corporategovernance framework is needed for Japan's markets.

The harsh reality is thatthe quality of corporate governance in Japan has lost much credibility and itslaws and rulesnow lag most other countries in Asia.

For instance, Japan should set a transition period of say seven years, during which all public companies would be transitioned into the same (new) type of committee-style governance framework, so as to standardize governance rather than perpetuate two confusing and imperfectly-functioning systems. The principal features of the new type of company should be something like: (1) the board is comprised of a majority of independent outside directors; (2) as in the UK, there is a clear division of responsibilities and rolebetween an independent Chairman (who is a director) and the President/CEO; (3) the board must have the three committees presently required by committee-style companies (audit, nominations, compensation), but is also legally permitted to freely create other committees which are valid for legal purposes, to which director duties apply, and to which decisions can be delegated (this is needed in situations such as MBOs, TOBs, etc.); (4) only independent directors sit on the audit committee (and probably the other two main committees), and the audit commmittee must appoint at least two kansa iin (lead members, i.e. those who have special authority to collect information and conduct independent investigations, as statutory auditors presently do.**)

In this sort of system, one possible source of candidates to serve as kansa iin (who as described, must be independent), would be persons who have served as full-time statutory auditors at other companies. In this sense, your idea might be implemented, but I thinkitmakes mostsense if it is part of alarger systemic change such as I have described.

* Background: Yesterday I replied to a comment on the Japanese-language site that was suggesting that the present position of full-time) (presently internal as opposed to outside) statutory auditors should be changed to one which requires outsideness (presumably meaning independence). The point of view of the comment was that the present system creates a information gap which will just continue otherwise. This is because in practical reality, the internal statutory auditors almost alwaysvpreviously worked at the company for many years and therefore have much better access to information than the outside statutory auditors. The implication of the comment was that an independence requirement should be imposed for full-time statutory auditors. I wrote the reply set forth above.

** Many foreign investors do not appear to know that under present law, independent directors do not have such authority.

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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