On October 3rd, 2013, I wrote this article in the Asian Wall Street Journal, proposing that Japan promulgate a corporate governance code as part of its growth strategy.
Soon after that I proposed to a senior person at the BOJ and then to key LDP dietmen (mainly Mr. Yasuhisa Shiozaki, who was a leader of the LDP’s growth strategy “Headquarters”) that the LDP create a corporate governance code in order to (a) expand upon (many times over) the comply-or-explain principle that was about to be set forth in the new Company Law in a very limited context; and (b) ensure that the Stewardship Code would have its intended positive impact, by requiring standardized, comparable disclosure about governance practices at each company.
Importantly, I proposed that the new governance code should be drafted by a panel organized by the FSA , the agency that should logically be held accountable for the result because the FSA’s Establishment Law puts it in charge of investor protection, capital markets efficiency, and regulation of the stock exchanges (the listing rules of which are the place where most CG codes principles are reflected). I presented a detailed memo proposal to the dietmen. （Here are the memos that I submitted to Mr. Shiozaki: (1) サマリー 、(2) 予算が要らない、最大に評価される三本目の矢、(3) メモの追記、(4) 諸外国の例。）
It was the optimal time to do this because earlier in the year the Japanese government had announced its first “Abenomics” growth strategy, which was largely modeled off of the White Paper published by the American Chamber’s “Growth Strategy Task Force“, which I had proposed and led in 2010. This Task Force was far more successful than I every dreamed it could be. Almost all of the themes in the “third arrow”, including the very concept of a coherent analysis-based growth strategy for Japan, the vital need to enhance productivity growth and economic metabolism, the importance of corporate governance and labor mobility, were identical to to the central themes of this White Paper. This was not surprising, because the LDP had even hired the same economist that we had hired, Professor Kyoji Fukao of Hitotsubashi University. (See: “Charting a New Course for Growth: Recommendations for Japan’s Leaders“.)
The report was very widely read, and its concepts seeped into the bedrock of policy-making circles. A book written by Professor Fukao based on the analysis we had commissioned, won the most prestigious prize for an economics book in Japan. In particular, the fact that by 2013 many in the government had come to agree that reigniting productivity growth was essential, made this the ideal time to propose significant corporate governance reform.
I then wrote an article about describing my proposal in the Japanese-language Asahi Journal -法と経済 at the end of January, 2014. This followed upon my October, 2013 article on the same topic in the Wall Street Journal. I later wrote two other articles like this in the same magazine over the following year or so (here is one of them, and here is another), deepening my recommendations regarding the principles and practices that should be in Japan’s governance code.
Subsequently, I was asked to make a formal presentation of my ideas to the LDP’s growth strategy committee (the Japan Economic Revival Headquarters), and did so on February 7th, 2014. Here are the materials I used to make my my presentation , and here are the most important first two pages translated into English. ） Members of the press (e.g., the Wall Street Journal) and the Financial Services Agency (FSA) were present.
Before and after my formal presentation, I advised key LDP members on how to go about creating a code: how to plan for a balanced makeup of the panel, the types of people who should be on it, and general conditions the code should meet. Mr Shiozaki met with the senior official at the FSA and the JPX (Tokyo Stock Exchange) to ask them to consider the concept. Most of my advice was followed simply because it made sense and was based on examples in other countries. Most importantly, the June 2014 growth strategy included my recommendations that the code should follow OECD principles, and should be such that it will be well-regarded by foreign investors; and that there should be a deadline set for the promulgation of the code. (The deadline was set at one year from June 2014.)
In July, I immediately made contact with the FSA person who had just been assigned to be in charge of the corporate governance code drafting process and communicated to him: a) my advice on the strategy to follow so as to enable the new code to be as highly regarded as possible abroad, while recognizing certain political realities here; and b) given that strategy, a memo containing the most important provisions that I thought should be in the code in order that it have the greatest possible positive impact on corporate governance in Japan. (Of course, the Code became a reality in June not just because of my input, but thanks to the fine efforts of many others over many years. See below.)
Among many other practices that I proposed which were ultimately reflected in the Code, I think two of the most important were the practice of self-evaluation by the board, and the concept that diversity be considered in order to make boards more effective. These were both included in paragraph 15 of my memo to the FSA, which read:
“15. Board evaluation: The nomination committee should undertake a formal and rigorous annual evaluation of the board’s performance and that of its committees and individual directors including the CEO, taking into account survey results, input from the executive session of outside board members, and other inputs. Evaluation of the board should consider the balance of skills, experience, independence and knowledge of the company on the board, its diversity, including gender, how the board works together as a unit, and other factors relevant to its effectiveness. The nomination committee should make a formal report to the board. The lead independent director, the nomination committee, and the board should act on the results of the performance evaluation by recognizing the strengths and addressing the weaknesses of the board and, where appropriate, proposing changes in board or committee practice, and/or proposing new members to be appointed to the board or seeking the resignation of directors. Individual evaluation should aim to show whether each director continues to contribute effectively and to demonstrate commitment to the role (including commitment of time for board and committee meetings and any other duties).”
Based on my own experience and that of other boards around the world, I thought that diversity – especially gender and nationality diversity, in the case of Japan – should be considered as an element that can increase the effectiveness of board. By including this concept as a matter to be considered on an annual basis in the self-evaluation, I wished to force Japanese companies’ boards to consider and explain (each year) why they were not nominating more women and foreigners, or persons with necessary skills and different backgrounds, to their boards.
Also in July, out of the blue I was asked by the the Nikkei Newspaper to submit an article in its famous “Economics Classroom” (half-page) column, about the key points that should be in the governance code.
Behind the scenes, until the Code’s finalization, I then “lobbied” and/or supported certain of the members of the council of experts for the Code, and members of the FSA itself, regarding what I considered to be key provisions that should be included.
As you can see, many of my ideas were incorporated into the new governance code, but some important recommendations were not. For example, the new code does not clearly set up a recommended framework for independent committees whereby independent directors can fulfill their full potential, and does not require disclosure of post-retirement compensation paid to former directors (e.g., sodanyaku and komon). Here is a marked version of my original memo to the FSA, showing the items that I think the next revision of the Code should include, as of the present time (March, 2015). There are other items of course; this only shows the items that were not covered at all, or not sufficiently, by the first draft of the Code.
For the record, none of my advice in any of these forums was done in the name of any organization. I made my recommendations on an entirely personal, individual basis. The Code, of course, came about because of the efforts of many people to improve corporate governance in Japan, over many years. Among many others that would become a much longer list, the work of the following groups and persons should be given great credit: the Secretariat and investor members of the Asian Corporate Governance Association, CG-net, Toshi Oguchi of Governance for Owners, Kazuhiko Toyama of IGPI, Yoshihiko Miyauchi of ORIX, Scott Callon of Ichigo Asset Management, Charles Lake at AFLAC, the Council of Institutional Investors, the ICGN, and the American Chamber of Commerce in Japan. Most of all, the hands-on leaders and policymakers who made it happen, – especially, lead dietman Yasuhisa Shiozaki and Masahiko Shibayama of the LDP, and Motoyuki Yufu of the FSA (and the entire FSA team) – should be highly commended. In addition, as is well known, the Ito report was published in August of 2014.
[Addendum as of early 2025] On a personal basis, I must admit to feeling a bit troubled that none of the aforementioned background, – including my discussions and proposals to Mr. Shiozaki and the FSA, and the inclusion of “diversity” – , have ever been mentioned in the media over the past ten years. Personally, I think it is an interesting story, and particularly relevant in the sense that Corporate Governance Code came about precisely because of diversity: collaboration between a foreigner who was an experienced outside director, and a visionary parliamentarian who had attended Harvard’s Kennedy School and originally hailed from the BOJ. Unfortunately, it is my sense that to many people in Japan, this is not something to “celebrate” as an example of diversity in action. Rather, many persons (and the media) still want to attach a well-known Japanese male face or institution to leadership in policy-making to help Japan in the future, despite the facts. Ten years after I wrote the above post, I feel that many persons in both companies and the media, still do not appreciate the true usefulness of diversity, and how it should be viewed as something we use to be more effective, and not just because there is a Code principle about it.
Nicholas Benes
Representative Director, BDTI
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.