ACGA / CLSA Release “CG Watch 2014”, Upgrades Japan to 3rd in Asia, Stresses Importance of Japan’s CG Code and Director Training

The Asian Corporate Governance Association and CLSA have released their well-known review of corporate governance in Asia,CG Watch 2014. This year the reportupgraded Japan to 3rd place in Asia (from a tie for 4th). Hong Kong edged out Singapore for the top ranking. The chapter on Japan can be downloaded here:

http://bdti.mastertree.jp/f/8wvh5dcj

In contrast to prior years,Japan got a lot ofpoints for the fact that the government is making a seriousgovernance reform push, has passed the Company Law with a comply-or-explainprovision about outside directors, (finally) plans a Corporate Governance Codeand has put in place a Stewardship Code. However, in conclusion ACGA/CLSA wrote (emphasis added):

Japan is still behind in director training and board evaluation

One area where Japan remains behind the regional curve, however, is in
director training and board evaluation. Several organisations provide
training, but it needs to become commonplace and accepted as an
inherently good thing for all directors (inside and outside, executive and
independent) to do. Meanwhile, many other Asian markets are moving
forward on director evaluation and, although still early days, this has the
potential to enhance board effectiveness considerably. We hope that Japan
takes up this idea too.

Downgrade watchlist
Factors that could force the country’s score to fall in 2016:

 Adoption of a national CG best-practice code that proves to be toothless
 No progress in mandating the adoption of independent directors for all listed companies
 No progress in encouraging the adoption of audit committees in listed firms
 Ineffective implementation of the new Stewardship Code by institutional investors
 No progress in boosting staff resources for key regulators such as the CPAAOB

Quick fixes
 Enhance corporate disclosure of internal-control and risk-management functions
 Enhance corporate explanations of executive and employee remuneration policies
 Release detailed AGM agendas at least 28 days before the meeting
 Improve information access in English on websites of regulators and companies
 Increase director training

BDTI's Nicholas Benes is quote later in the report, in the Resarch Perspectivessection:

There is no skill or experience requirement for outside directors
[note, not just re outside directors, is the intended meaning]

The percentage of outside directors has increased considerably since 2011:the market cap-weighted average is now 24.3% for the Topix-500 companies,against 87.2% for the S&P500. Unfortunately, while most companies haveoutside directors, there is still no skill requirement. Nicholas Benes is therepresentative director of The Board Director Training Institute of Japan(BDTI), a non-profit, public-interest organisation certified by the Japanesegovernment with a highly regarded “bootcamp” course for directors(http://bdti.or.jp/english/). He commented to Benthos, ‘Japan is one of thevery few countries in the world that doesn't have any rules whichever aboutknowledge or training requirements for board members – or even rules for disclosure about such things. Pakistan, on the other hand, requires alldirectors to receive training and certification from approved institutions, withrare exceptions – for instance, for those with many years of board experienceor foreign training. Japan’s position on this is particularly odd because: a)even statutory auditors, whose job to perform “accounting audits” and“legality audits”, don’t need to know anything about accounting or law; b) theOECD has prioritised director training in Asia; and c) most companies inJapan wish their boards to have a clear majority of insiders, who by definitionhave almost never sat on a board before, so they have no experience. Yet ISS[Institutional Shareholder Services] advises, and most investors vote, to electall of these directors, no questions asked.’

Japan has made significant changes in the past two years

Asked for his appraisal of changes over the past two years, he commented‘There have been five major advances. First, because of the long debate thatdragged on about outside directors, more and more Japanese companiesstarted to see the light and autonomously started appointing outside directors,and with this has come a greater understanding and acceptance of their roleand value. Second, the Company Law was finally passed with a rule requiring(de facto) each listed company to appoint one outside director, supported by astrong “comply or explain” provision. Third, the Stewardship Code was put inplace and 127 institutions voluntarily signed on to it; more will come, becausethe FSA is pressuring institutions to commit to it. Though stewardship practiceswill take time to develop, one should not underestimate the changing of thetide from “stable, quiet shareholders” that this represents. Fourth and mostimportant, pursuant to the Revised Growth Strategy, the FSA and TSE have setup a Committee of Experts to set the core policies of Japan’s first corporategovernancecode, which the TSE will reflect in its listing rules so that it can beenforced on a “comply or explain” basis. The code is required to fit with theOECD’s principles, be internationally well-received, and must be up and runningin time for next year’s AGM season. Last, we have seen a number of moreminor but still significant reforms, such as double derivative lawsuits, theselection of the audit firm by kansayaku (statutory auditors) and strengtheningof internal requirements for subsidiaries .’

The Stewardship Code has the potential to bring epoch-making change [note, this should read “The Corporate GovernanceCode”]

He is by no means despondent: ‘I believe that the drafting of a corporate governancecode by Japan has the potential to be an epoch-making change.For the first time, there will commence a meaningful discussion about “bestboard practice” in Japan. Moreover, the use of “comply or explain” disclosureabout governance practices at each firm is what will enable institutions to bebetter “stewards”, thus allowing the Stewardship Code to be much moreeffective. And the government has sent clear criteria: that the code be“internationally well-received”. It is not possible to meet that goal withoutmultiple independent directors, board committees and rules aboutknowledge/skill levels and training for board members, whether inside or outside. The code will probably raise the bar across the board.’

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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