(Bruce Aronson isProfessor of Law at theGraduate School of International Corporate Strategy, Hitotsubashi University, and serves as anAdvisor at
Nagashima Ohno & Tsunematsu. This article was previously published in JASBA's magazine,Gekkan Kansayaku. )
The 40th anniversary of the Japan Audit & Supervisory Board Members Association (“JASBA”), the professional organization of kansayaku (audit & supervisory board members), comes at a time when the role of JASBA is assuming ever greater importance. There is increasing debate about the effectiveness of kansayaku and whether Japanese corporate governance would be better served by placing a greater emphasis on outside directors. Accordingly, there is a great need for providing information on the actual role of kansayaku at Japanese corporations and promoting better understanding of their role, particularly with respect to foreign investors.
Despite the current debate, it is unrealistic to promote any reform program for Japanese corporate governance that is based on the abolition of kansayaku and their replacement with outside directors in the near future. JASBA has some 5,800 largely corporate members and 7,600 registered individuals. They represent a powerful force and kansayaku remain popular with the bulk of Japanese companies. This only increases the need for a better understanding of the actual function of kansayaku and their current and potential contribution to corporate governance in Japan.
In fact, we do not know enough about kansayaku. First, we do not have a clear idea of who they are. The Companies Act requires that half or more of the kansayaku at large companies must be outsiders. My impression is that a substantial number of outside kansayaku come from the company’s “main bank,” and that the qualifications of inside kansayaku are improving as the average number of directors on boards of listed companies has shrunk. However, there are no data against which to judge this impression. Furthermore, even if kansayaku increasingly have the qualifications and experience to monitor a company’s financial and other decisions, do they have a sufficiently independent mindset to actually do so?
We are also uncertain as to what kansayaku actually do. Their traditional authority under the Companies Act is to “audit” for illegality (ihōsei) and for the best interests of the corporation (datōsei). This role has been criticized by foreign investors as being essentially a compliance function. However, many kansayaku claim that their role in practice is becoming broader and focusing more on risk management. Again, it is difficult to measure or judge actual practice.
In the absence of data on actual practices, debate tends to center on the legal powers of the kansayaku under the Companies Act. For example, the most common comment from global institutional investors is that kansayaku lack the legal authority to supervise management: they attend, but have no right to vote at, board meetings and also cannot fire the company president. Kansayaku do, however, have important powers of their own, including a right of investigation. There is also a popular anecdote among some large Japanese companies that a negative comment by a kansayaku at a board meeting does, in practice, prevent a company from proceeding with the proposal. According to this view, company management does not, in their own minds, distinguish between the roles of outside kansayaku and outside director, as both groups question a variety of management proposals and practices. But even if this is true for some companies, how many?
Direct comparisons between the roles of kansayaku and outside directors are not easy, since they each comprise just one component of differing corporate governance systems. Weaknesses in monitoring at Japanese companies may result from factors that affect both outside directors and outside kansayaku, such as the president having too much influence over all top-level appointments and a lack of a strong supporting environment for monitoring in terms of the availability of information and strength of enforcement.
Voluntary corporate governance reform at leading Japanese companies may also act to strengthen the role of kansayaku. Recent reform efforts are often described as a hybrid approach in which Japanese companies seek to build on their traditional strengths (including kansayaku) and incorporate a greater element of monitoring by voluntarily adding a number of outside directors. Such efforts try to combine insiders’ information with outsiders’ independence to achieve more effective board functioning. Kansayaku generally look favorably upon this hybrid approach. The challenge for Japanese corporate governance is to find a way to standardize and spread these emerging best practices by, for example, utilizing a corporate governance code that is implemented through a comply or explain approach.
Direct comparisons of the different roles of kansayaku and outside directors have led to complaints that it is difficult to explain the kansayaku system to foreign investors because it is “unique” to Japan. However, at least in a broad sense, many countries in Asia have similar audit or supervisory boards, including Korea, Taiwan, China, Vietnam and Indonesia. Perhaps convinced of the “uniqueness” of the kansayaku system, to date there has generally been insufficient effort in Japan to explain this system to foreign investors.
This is where the role of JASBA is critical. Over the past two years JASBA has begun to make greater efforts to explain the role of kansayaku, including producing materials in English on their website. Indeed, I believe that the level of discussion concerning the role of kansayaku has begun to evolve and become more sophisticated. However, there is still an overall lack of data and research on the role of kansayaku and the need to produce and disseminate such information remains great. It is both a challenge and an opportunity for JASBA to increase its efforts and expand its role to assume a central position in the debate concerning the role of kansayaku in Japanese corporate governance.
– Bruce Aronson