Ethical Boardroom:”Japan’s shareholder Rights and The Arms of The Revolution”

Japan’s return on equity (ROE) revolution is now underway and is evolving into a revolution in corporate productivity and return on investment underpinned by Japan’s Corporate Governance Code, which established fundamental principles for governance at listed companies in Japan, and Japan’s Stewardship Code, which established principles for institutional investors.

Together, these two ‘wheels of the cart’, as dubbed by Japan’s powerful Ministry of Economy, Trade and Industry, establish the framework to drive this revolution forward. They will, in combination with the strong shareholder rights provided by Japan’s Companies Act, ‘function as ‘invisible hands’ influencing a company’s directors, management and engaged shareholders.

And they will be most the powerful and effective when they work together.

On the ‘corporate’ side of the equation, internal and external directors are now offered training at the Board Director Training Institute (BDTI) and other groups, which offer teaching courses on being a director – including financial literacy, governance theory, legal responsibilities and the best practices set forth in the Corporate Governance Code. Based on the Corporate Governance Code, directorship training covers topics that include:

1. Nominating directors using objective criteria and a fair and transparent process

2. The role of the board in setting strategy and goals, including financial metrics, such as ROE and ROIC (return on invested capital), and independently monitoring progress towards those goals

3. Continuing training and updates on emerging issues for existing board members and development of successors for the executive team and the board

4. Setting the company’s culture and ‘tone at the top’ and living by those principles, including assuring full protection for whistleblowers

5. Self-review by the board as a group and of committees and individual directors. Analysing shareholder objections/suggestions when they are voiced and taking action as appropriate

6. Adding new viewpoints to the board by increasing diversity, such as by including women and foreign nationals

7. Establishing an independent advisory committee to handle compensation, nominations and other matters for which the interests of management can diverge from those of the company

8. Appointing a lead independent director to facilitate communication between the directors, shareholders, employees and management

9. Appointing more than one third of the board as independent directors in order to facilitate the above measures, as is encouraged for global companies by the corporate governance code (currently the Corporate Governance Code calls for only two for ‘comply-or-explain’ purposes, but I think that will change to include more in the future)

10. Ensuring appropriate and timely public disclosure of all relevant information to shareholders, including actual governance practices and the detailed reasons for any non-compliance with the Corporate Governance Code

Tools to improve governance

In intensive courses and seminars teaching both basic knowledge and leading-edge governance practices, BDTI and others are spreading the knowhow that Japanese boards and their directors will need in the new environment. The velocity of change at Japanese corporate boards is increasing (albeit from a slow start). The other wheel of the cart is the shareholder, of course.

Contrary to popular wisdom when it comes to shareholders, those interested in fulfilling their duties as signatories to the Stewardship Code to help improve their portfolio companies for their best long-term interest are blessed with some of the best tools in the world: the strong shareholder rights set forth in the Companies Act……”

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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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