Joint Audit Committee-Style Company – Proposal by METI

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1. (We have received the following comment on the Japanese site, and are moving it to the English site. – Admin.)

   For those who cannot read Japanese, I am attaching a summary English translation. Since for some reason I could not log on to the English site, I am submitting it here on the Japanese forum/site. (File:  http://bdti.mastertree.jp/f/p5k7vzjg )

   Because it clothes itself in a few references to "independence" but does not  actually propose any requirement for independent directors on Japanese boards, the METI proposal is essentially a clever way of avoid doing the latter. 

   What is going on is a sort of deft “bait and switch" to substitute “non-executive statutory auditor/director” for “independent director", and then make everything optional and voluntary in the name of "flexibility."  So, no independence, and no requirement of it.  (However, despite the supposed focus on "flexibility", committee-style companies will apparently not be allowed the optional flexibility to freely form committees other than the normal three. Go figure. I guess METI doesn't want to give kansayaku-type companies too much incentive to convert to committee-style companies instead of the the new thing they are proposing. )

   The idea of slowly transitioning statutory auditors into one possible source of independent voting directors (if nominated) is one that has been around for a long time, and deserves consideration because there are simply so many statutory auditors that they form a huge political constituent group of "known" people that companies are comfortable with, who (in large public companies) often have more knowledge and sense of "governance" mission than some of the outside directors one can end up with. The competent members of this group could, in the future, serve as independent directors of companies other than the ones where they spent most of their careers. The system should definitely seek to make continued use of these human assets. 

   So, some sort of planned transition could make sense, IF it was combined with a definition of "independence" and clear requirements (to be phased in) that half of the board of any public company be composed of independent voting members at some point in the future. That might rekindle investor confidence. In the absence of that, the METI proposal is just legislative trick to sluice statutory auditors whom companies are comfy with into the role of "non-executive but not necessarily independent director" instead of requiring independent directors.

   Without a unifying requirement that half the board be comprised of independent directors (from any good source), as a legal rule applied to all public companies, METI's proposal will just confuse and dismay investors.  The Company Law will read even more like spaghetti than it does now.  We will have three confusingly optional governance structures instead of two, none of which are very good, and less investor confidence than we have now, because Japan has (once again) been led around by the nose by managers and the Keidanren, ignored investors, and not done what needs to be done. 

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2. I see no problem at all with allowing a company to have both committees and statutory auditors.  That this "fix" is necessary at all reflects the underlying spirit of the Company Law.  The author(s) of the Company Law, employees of the Ministry of Justice, don't understand that corporation laws should be simple and essentially permissive. The Company Law by contrast is a regulator's delight of narrow categories, detailed procedures and traps for the unwary that takes up nearly as many pages as  the Patient Protection and Affordability Care Act (aka Obamacare).  That the Company Law dictates that a company must either have committees (which have to be nominating, audit and compensation committees), or statutory auditors, but cannot have both, reflects a petty bureaucratic worldview that misunderstands what a corporation statute is all about.

   METI's proposal, it seems clear, is not designed meaningfully to increase board independence.  METI is just trying to make the unpopular "committee" style company (only about 40 TSE listed companies have adopted it) more palatable by fuzzing it up a bit.  But keep in mind that even the pure form of "committee" style company itself doesn't guarantee true independence.  The only requirement imposed on a "committee" style company is that a majority of the members of the three committees be "outside" (not "independent") directors– i.e. they can come from your main bank, suppliers, customers, law firm, accounting firm, or even your own affiliates and subsidiaries.  

   Nomura Holdings prides itself on having adopted the most radical committee style corporate governance structure in town, including a majority of "outside" directors and only two out of twelve directors who simultaneously serve as executive officers.  Yet if you look at who is on the committees and the overall board composition, it is quite clear that the dramatis personae have been carefully selected in a way that will offer no surprises or challenges to the "real" management of the company.

    http://www.nomuraholdings.com/investor/library/ar/2009/pdf/ar_all.pdf

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