BDTI’s Representative Director Recommends Rules Regarding Board Training to Minister Nakatsuka (in charge of the FSA)

The Representative Director of BDTI has recommended in a letterto Minister Ikko Nakatsukathat the Japanese government adopt rules with respect to the training of board members or the disclosure of company policy about such training.

Minister Nakatsuka is theCabinet Office's Minister of State for Financial Services, the New Public Commons, and Measures for Declining Birthrate, Gender Equality, all of which are relevant in this case. The letter isreproduced below, and it can be downloaded with all attachments at the link at the bottom of this page.

November 19, 2012

Mr. Ikko Nakatsuka
Minister of State for Financial Services, the New Public Commons, Measures for Declining Birthrate, Gender Equality
Japanese Cabinet Office
3-1-1 Kasumigaseki

Dear Mr. Nakatsuka,

It was a pleasure to meet you at the recent reception.

As I promised in my earlier email to your office, I am pleased to be sending you information on the topic of governance-related training for board members and the executives who support them. I know this will a topic of great interest to you, given your roles which relate not only restoring trust in financial markets, but also gender diversity and the promotion of “New Public Commons”, a concept that is very well exemplified by the “public interest organization” which I lead (BDTI). My explanation is as follows.

Unlike Most Countries, Japan Has No Rules About Board Training and Competence

Despite a number of corporate governance-related failures and investor losses over the years, including the Olympus scandals of 2011, Japan is rare among stock markets globally in that it its stock exchanges have no rules whatever regarding the training or knowledge of board members. As shown by the Asian Corporate Governance Association’s recent downgrading of Japan’s overall corporate governance to 4th place in Asia (on a par with Malaysia), the perceived quality of corporate governance in Japan has not improved on a relative basis in recent years. “Board training” is the area where the widening gap is most glaring.

In contrast to Japan, the vast majority of foreign markets have rules about the training of board members. Such rules are usually contained stock exchange listing rules, disclosure requirements, or “corporate governance codes”. The rules usually require training for new board members as well as continuing education, or at least require each company to disclose its policy with respect to the training and induction of board members, including simply whether it has any policy or not. In Asia, where one of the OECD’s priorities as agreed last November was “board training”, a number of countries make significant reference to training in their Codes of Corporate Governance, – including Singapore, Korea, Hong Kong, India, and Malaysia.

This Erodes Confidence in Financial Markets and Slows Progress Towards GenderEquality

The fact that Japan has no rules about this important topic is particularly strange, and significantly erodes confidence in the country’s stock markets and corporate governance, when considered in light of the following:

1. The skills, knowledge, and mind-set needed to responsibly serve as a board member are different from the characteristics that contribute to promotion as a corporate manager. For instance, unless he or she has had some other training, the General Managers in charge of Sales, Products Development, or the Personnel Department often know little about essential matters such as corporate governance, the Company Law, securities law, accounting, finance, risk management, compliance, or oversight of M&A transactions.

2. As a prime example, under Japanese law the role and duty of statutory auditors is to perform “accounting audits” and “legality audits”, but at present Japan’s “rule-less” stock markets tolerate a disturbing situation in which statutory auditors are not required to have any knowledge about, or training in, accounting and law. Shockingly, a person with absolutely no knowledge whatever about those two subjects can be appointed and elected as a statutory auditor and serve his or her full four-year term, without ever having to even newly acquire such knowledge during that time.

3. Because approximately 85% of all directors at Japanese companies are “inside directors”, in almost all cases the vast majority of newly “promoted” executive directors have no prior experience serving as a director of a public company. In this sense Japan is very different from most other nations, where many of board members are “outside” and therefore have previous experience as board members at other firms. Since the majority of companies do not provide training for board members, this means that Japanese shareholders’ meetings are mainly electing board members who will simply have to “learn as they go”. This amounts to “OJT on the board”, notwithstanding that this is one forum where “learning from one’s mistakes” cannot be tolerated. Japanese society and stakeholders in Japanese deserve far better than this.

Looking at the upside, Japan is also different in the sense that precisely because most board members are promoted internally, it would be very easy for Japanese companies to provide them with in-depth training in advance. But as noted, at currently there are no rules that give Japanese listed companies an incentive to do this.

4. Because the majority of listed Japanese companies do not provide board training in advance of their election, and because disclosure about training is not required even if it was given, investors in Japanese companies are currently forced to elect approximately 85% of directors without having enough information to reasonably judge whether they are fully qualified or not.

5. Lastly, as you well know the policy of the Japanese government is to encourage the private sector to significantly increase female membership in senior corporate positions from the present exceedingly low level (1-2%), which is one of very lowest in world wide comparisons, even in Asia. However, Japanese companies complain that they cannot find enough qualified candidates for board positions. Board training courses can significantly remedy this situation, while also providing good reason to promote women faster within corporations.

To Date, Policies of the FSA and the TSE Have Been Wholly Inadequate

After the Olympus scandal, the Tokyo Stock Exchange solicited public comments with respect to its proposed“Revisions to Listing Rules Regarding Corporate Governance to Restore Confidence in the Securities Market”. Those proposed revisions focused almost entirely on “outside board members”, which as noted above only comprise about 15% of all board members at listed companies. The revisions did nothing to address the issue of “training”, or the issues described above, especially with respect to the other 85% of board members which are the ones who actually control the governance of Japanese listed companies.

As a result, in public comments submitted at that time, or in other publicized opinions, a number of influential persons and organizations expressed their dissatisfaction, pointing out that it is essential for the TSE and/or the FSA to promulgate rules that either require training for board members or at least require each company to disclose its policy with respect to the provision of such training.

To my knowledge, the organizations or persons who have expressed views about the need for board training include the following:

Asian Corporate Governance Association (ACGA)
Keizai Doyukai
The American Chamber of Commerce in Japan
The CFA Society of Japan
Japan Society of California
The Economist (magazine)
CLSA (securities firm)
Michael Woodford (former CEO)
Kazuo Noda (Professor and Chairman of the Japan Research Institute)
Yuri Morita (former statutory auditor, Advantest)
Steven Towns (fund manager)
28% of Mizuho Financial Group’s shareholders voting at the 2012 Annual Meeting

With the support and leadership of the FSA, it would be a very simple matter for the TSE to add to the Corporate Governance Reports which it requires all TSE-listed companies to submit, a category requiring each company to describe its policy with respect to: (1) the training of executive board candidates prior to their nomination; and (2) its assessment of the need for, and the provision of, continuing training or education, for all board members. Companies which have no policy could simply disclose that fact; and companies whose policy is to act on an “ad hoc basis”, could disclose that situation. Conversely, those firms which have a clear policy, and are doing a good job in this respect, could disclose that to investors, thereby restoring confidence to the markets and providing a healthy incentive for companies to do what is in their own best interests anyway: to train board members in advance of their appointment.

In fact, last June a shareholder submitted to Mizuho Holdings a shareholder proposal that would have required that company to provide more detailed disclosure than that which is suggested above. This proposal gained a 28% voting support ratio at the Annual General Meeting, the highest of any support ratio at Mizuho’s meeting that year and the 4th highest support ratio for all shareholder proposals submitted in Japan during 2012. This occurred in a country – Japan – where such high support percentages are exceedingly rare. Thus, it is clear that many investors would welcome disclosure about board training.


On behalf of Japanese corporations, their employees and other stakeholders, and the investing public whose interests it is the duty of the Financial Services Agency to protect, I respectfully recommend that Japanese government promulgate (or cause stock exchanges to promulgate) rules with respect to the training of board members.

Nicholas Benes
Representative Director, The Board Director Training Institute of Japan


Letter to Minister Nakatsuka with Attachments-1-19-2012

(Click on Download Asset atlower right)

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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