ACCJ Releases Viewpoint: “Calling upon the LDP to Follow Through on its Campaign Promise to Reform Corporate Governance”

The American Chamber of Commerce in Japan (ACCJ) issued a Viewpoint which calls on the Liberal Democratic Party (LDP) and the Government of Japan led by Prime Minister Shinzo Abe to act swiftly to ensure that the proposed amendments to the Company Law to be submitted to the Diet include the measures described in the LDP’s own campaign platform to accelerate corporate governance reform. BDTI closely watch (a)(iii).

The Liberal Democratic Party (LDP) of Japan’s recent return to power followed a successful political campaign based on a proactive policy platform, including a robust set of corporate governance reforms intended to restore confidence in the Japanese financial markets and encourageeconomic growth. In its “Comprehensive Policy Proposals” dated
November 27, 2012, the LDP’s campaign promised to:

accelerate corporate governance reform through such measures as tightening the definition of outside directors, mandatory adoption of multiple independent directors at listed companies, reviewing functions of statutory auditors and independent directors in appointing an external auditor, a more effective whistleblower system, a regulatory framework to discipline the relationship between a parent company and subsidiaries, a review of the audit firm and
public accountant system, tougher penalties for misconduct and indemnification for those who voluntarily surrender.1

The ACCJ applauds the LDP for its foresight in adopting this important position. Unfortunately, the Ministry of Justice (MOJ) Legal System Advisory Council Company Law Committee (the “Company Law Committee”) appears ready to submit to the Diet proposed amendments to the Company Law that were prepared by the prior administration, and fall far short of the LDP’s
campaign promises, especially in respect to the implementation of a requirement for independent directors.

The American Chamber of Commerce (ACCJ) calls on the LDP and the Government of Japan led by Prime Minister Shinzo Abe to act swiftly to ensure that the proposed amendments to the Company Law to be submitted to the Diet include the measures described in the LDP’s own campaign
platform. Accordingly, the ACCJ recommends the following specific changes to Japanese law and regulation:

(a) amend the Company Law to include a definition of “independent outside director” that is consistent with global best practices;

(b) add detailed rules to the Company Law, Financial Services Agency (FSA) regulations and the rules of stock exchanges such as the Tokyo Stock Exchange (TSE) to require each publicly-listed company to: (i) identify which, if any, directors or director nominees fit the definition of independent outside director; (ii) for each director or director nominee that is identified as independent, disclose any transactions or relationships that were considered by the company’s board of directors in determining that the
director is independent; and (iii) disclose the company’s policy with regard to director training, both with respect to training of executive directors before nomination, and continuing education of all directors;

(c) amend the Company Law and/or listing rules of Japanese stock exchanges to require that at least one-third of a listed company’s board of directors be independent outside directors;

(d) amend the Company Law to permit a board of directors to formally delegate decisionmaking authority on specific matters to a “special board” comprised entirely of independent outside directors, along the lines of Article 373 of the Company Law;

(e) amend the Company Law so that where no such “special board” onsisting solely of at least three independent outside directors is utilized with regard to specified types of board resolutions where the risks of self-interest and conflicts of interest are inherently high, the burden of proof will be shifted to directors with regard to satisfaction of their duty of due care and duty of loyalty; and

(f) create legal infrastructure for “shikkouyaku” executive officers, including CEOs with representation authority, who can be appointed by the boards of statutoryauditor-style companies. This amendment should be similar in structure to the legal rules currently governing executive officers (as defined under Japan’s Company Law) at committee-style companies, including codification of the legal duties, responsibility, and potential liability of such
executive officers.

You can download the recommendations at thefolloing| addresses:

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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