ACCJ Viewpoint: ” Further Implement Corporate Governance Reform in Japan to Spur Investment and Growth”

The ACCJ just released a detailed Viewpoint, urging the Government of Japan to do what it promised to do when it was elected, and more. The summary is below, and the report can be downloaded at the link below.

The Liberal Democratic Party (LDP) of Japan,in its return to power, built a proactive policy platform, including a robust set of corporate governance reforms intended to restore confidence in the Japanese financial markets and encourage economic growth. Inits “Comprehensive Policy Proposals” dated November 27, 2012, the LDP 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.

The American Chamber of Commerce in Japan
(ACCJ) applauds the LDP for its foresight. The
Government of Japan (GOJ) has since submitted
to the Diet proposed amendments to the
Company Law that can be even more effective
through the implementation of the reforms
put forward by the LDP in 2012, especially in
respect to the implementation of a mandatory
requirement for multiple independent directors.
In this context, the ACCJ calls on the GOJ to
act swiftly to ensure that the Company Law
includes the measures put forward by the LDP
to supplement and reinforce these measures by
implementing a Corporate Governance Code,
which the LDP is now considering and which is
addressed in a separate ACCJ Viewpoint.
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 and disclose 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,

any and all transactions or relationships

that were considered by the company’s

board of directors in determining that the
director is independent; (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;
and (iv) with regard to each board director
or statutory auditor, disclose the board’s
concrete reasons for concluding that person
has sufficient knowledge of accounting, law
and finance to serve as a capable member
of the board;

(c) amend the Company Law and/or listing
rules of Japanese stock exchanges such as
the TSE 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” consisting 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 the 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 the Company
Law) at committee-style companies,
including codification of the legal duties,
responsibilities, and potential liability of
such executive officers.

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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