CFA Institute: Review of Companies Act – Interim Report

The CFA Institute Standards and Financial Market Integrity Division and CFA Society of Japan made comments on the main item in the document, namely on the introduction of independent directors. And to ensure proper fulfillment of the function of independent director, CFA Institute strongly suggests proper training of directors, as below.

“An induction course introducing new directors to the company, its operations and strategy, as well as the applicable legal and regulatory framework the organization works in is the absolute minimum level of training that should be required. We believe increasing director training to a level at which directors can pursue a formal certification would benefit all stakeholders. Companies are finding it difficult to appoint appropriate directors; establishing a certification program that is well recognized in the region should make it easier for them to identify a qualified pool of directors. If the program is accepted by directors, encouraged by investors, and advocated by regulators, then over time, director education will increase and directors will gain a greater understanding of what it means to be a director….”

“When inviting an outside director to serve on a board great attention must be given to the degree of independence of that person in order to minimize potential conflicts of interest. We believe that an independent non-executive director should NOT:

•be a current or past employee of the company or its subsidiaries,

•be connected to the management/board of the company or its subsidiaries,

•be a substantial shareholder or connected to, or represent, a substantial shareholder,

•represent other interest groups that could exert significant influence (suppliers, customers, creditors, etc),

•be an employee/partner of a professional firm that has a current or past business relationship with the company/subsidiaries or a related party,

•participate in the company’s share option or performance-related pay scheme or receive financial assistance from the company/subsidiaries or a related party,

•receive an income from the company other than directors fees,

•have conflicting cross-directorships,

•serve as a independent director for more than the specified length of time.”

Of the 3 proposals, CFA favors proposal B (make it mandatory for listed companies which are obliged by law to submit an annual report as part of regulatory reporting to elect at least one outside director). “The reason for this is that regardless of the size of the firm, it would be against the principle of fairness if investors in one firm would not have the same level of legal protection as in another firm of different size.”

The full text of this document:

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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