Introduction: The Background, and the Big-Picture Problems
Where We Started
Legal and Agency Problems
As you can see in the attached PDF, there were (and to some extent still are) a number of legal and agency problems lurking behind the structure of the law. And when the DPJ party proposed amending the Company Law, it turned into a three-year debated about whether or not the law should require (on a mandatory basis) one outside director. To anyone who had studied how governance had evolved in most other countries, it was clear that “hard law” (the Company Law) would be insufficient, and that “soft Law”, – i.e, a “comply-or-explain” corporate governance code – was needed.
The Core Problem: Many “Internal Boards” Had Become Ineffective
Common Features of Such Boards
Here are some of the features that are common to many such Japanese boards:
- It is hard (almost impossible) to criticize the “senior” directors (or CEO; or post-retirement “advisors”)) who “promoted” you. The politics of “promotion” to the board (being valued as loyal manager) results in low awareness of responsibilities and liability of directors
- In the absence of any other standard or pressure, “directors” often think, act like managers in a hierarchy. “Aren’t the two roles the same? Instead of “maximizing”, “salary-men” often avoid risk, keep head low
- Many outside directors are friendly “cocker spaniels, not dobermans”, as Warren Buffett once quipped.(“Companies are not looking for Dobermans on the board; they are looking for Cocker spaniels.” ) Moreover, there are many fewer of them.
- There are few rigorous, consistently-shared concepts of “best practices” or the role/purpose of the board, aside from satisfying minimum corporate formalities
- Boards often put off the difficult decisions that are most needed: divestments, restructuring, strategic redirection, capital allocation and reallocation. Bold new ideas are viewed as disruptive and political opportunities to undermine an “opponent”
- “Director professionalism” and common skill sets are badly needed – including among outside directors. Directors often lack key skill sets (e.g. finance and understanding financial statements) needed for directing
An All-Too-Typical Board in Japan Is Surprisingly “Short-Termist”
When you sit on such boards, as I have, you would never know that the company is one whose managers pride themselves at “thinking long-term”. Below, I have set forth some of the common features of such boards, most of which actually tend towards short-term thinking; scarcity of new ideas, investment projects and strategic alternatives (or debate about them); and insufficient risk-taking even when clearly warranted.
- The board is very formalistic. The main objective is to “satisfy the minimum requirements of the Company Law”. Aside from that, there is no clear consensus or commitment about priorities or the purpose of board meetings
- Far too much time is spent on detailed reporting of monthly results and how we are tracking to “the annual plan.”
- Almost never looks at financial results using long-term (time series) data
- There is not nearly enough analysis/consideration of long-term trends and/or new strategic options. “Strategy” is designed to “fit” the assets and people the company presently has, without considering adding new ones, and tends to be just an extension of past strategy
- We only debate things that are largely already decided. Management does not ask for or confirm “the sense of the board” at an earlier stage
- There are so many minor items on the agenda that there is not nearly enough time to spend discussing the most important issues, ..which may not even be taken up at all
The Board Director Training Institute of Japan
All opinions expressed here are solely my own personal opinions.
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 offerings for both corporations and investors here.