Disclosure of Executive Compensation Required by New Cabinet Office Order… and Companies’ Responses

On January 31, 2019, the Cabinet Office Order on Disclosure of Corporate Affairs was amended, and the format of for securities reports was changed. With regard to the securities reports for the fiscal year ending March 2019, it is said that the employees in charge of dealing with the new format were put under considerable stress and extra work. The most troubling item was probably the section on executive compensation.

The revision of the Cabinet Office Order was made in response to the Financial Council Disclosure Working Group (DWG) report published on June 28, 2018. Mr. Carlos Ghosn was arrested in November of the same year, and executive compensation, which has been a subject of much debate for some time, once again disturbed the public mind. The new format, modified under these circumstances, calls for broader and detailed information disclosure. However, the top executives of many companies view disclosure of compensation as undesirable, because it has carries the potential for divisiveness or embarrassment. Mr. Ghosn’s false statement of compensation was attributable to this sense of aversion. Not only him, but also many other executives, desire as a basic human emotion to avoid disclosure of the amount of their compensation.

What were these two contradictory vectors, – requirements from Cabinet Office Order, and the company leaders’ intentions – reflected securities reports? Although we should wait for the thorough analysis on many securities reports published at the end of June 2019, in this article I would like to convey the initial impression that I obtained by surveying a few of them.

First of all, let’s start by checking the disclosure items in “Writing instruction (57) – compensation of directors, etc.” of the new form No. 2. In simpler words, the following three items are required to be disclosed:

(a) the contents and the decision making method of the amount or the formula of the compensation for directors, etc.

(b) Total amount, subtotals of compensation type (fixed, incentive, retirement bonus, etc.) and the number of people for each category of director, etc., and

(c) The name and discretion range of the decision-maker of the amount or the formula of compensation.

Item (b) has a subspecies (b ‘) that requires individual information for director or etc. with a total aggregate compensation of ¥100 million or more.

DWG minutes suggest that the items of (a), (b) and (c) above are respectively the compensation calculation formula that was applied, the result of calculation by applying the formula, and the process of calculation. The investor side validates (a) the formula by plugging real numbers into the components of the calculation formula (such as KPIs), and confirms whether the result is consistent with the (b) total compensation.

The compensation determination process is considered to be transparent if consistency can be confirmed to some extent, if not 100%.  If it consistency cannot at all be confirmed, it is considered as a black box. Item (c) seeks to increase transparency by asking about the procedure of this process. If the allocation to each director is delegated to the president, it must be stated in the securities report.

Reassigning/delegating allocation authority to the president is a quintessential form of the “black box”, and there have been calls for regulation of such delegation. Under such circumstances, it is difficult for companies to write “we leave it up to the President” in the securities report. The new form seems to aim at a de facto ban of such delegation by requiring disclosure, without a formal ban. Another way to give the President discretion would be the establishment of an non-mandatory compensation committee. Instruction (57) requires, in the case where a compensation committee is installed, a description of its procedural rules and activity report in the most recent fiscal year. It is considered to be a rule not to make the compensation committee a black box on behalf of the president.

With regard to the item (b ‘), which requires the disclosure of compensation for each director, etc., the discussion focus in DWG was on whether to eliminate the ¥100 million threshold for disclosure. However, although a review (elimination) at some point was mentioned by the DWG, the abolition at the current stage was postponed. Calls for the disclosure of (b’) the compensation of each director were not as many or as strong as I expected, but the calls for the disclosure of (a) calculation formula and (c) process were many, according to the minutes of DWG. Thus, the items required by the new form No. 2, and the reasons therefor, were shaped as described above.

How did companies respond to these requirements in their securities reports for the fiscal year ending March 2019?

According to Tokyo Shoko Research, individual disclosures of persons receiving ¥100 million or more increased. “By June 28, 17:00, 2,400 companies’ securities reports for the fiscal year ending March 2019 were submitted. Of these, 275 companies disclosed individual disclosure over ¥100 million in director compensation. The number of companies in this group increased by 35 from the previous year of 240. The numbers of people in this group increased by 26 from the previous year, up from 538. Both numbers – for both companies and people – were the highest ever recorded. “


Individuals’ aversion towards compensation disclosure has diminished, which seems to be a sign that the environment for providing information to investors has improved. However, if the investors’ interest and focus is (also) on (a) the calculation formula and (c) process, the current environment is not sufficient.

I sensed from looking at some of the disclosed securities reports that there is polarization in the companies’ responses, and also that companies that have been keen on information disclosure have been increasingly honed. Some companies have turned to information disclosure, to a degree which is at markedly different level compared to the year ended March 31 2018. On the other hand, there are other companies whose securities reports in 2018 and 2019 don’t reflect much difference at all. In these, it is possible to read a clear intention to minimize disclosure of executive compensation.

For example, at company X (a non-life insurance firm), the statement on executive compensation, which was about the size of one page in the previous fiscal year, was increased to 12 pages and used many charts and graphs in the fiscal year ending March 2019. On the other hand, at company Y (an electric machine producer), the volume increase is about half a page, and the contents are dry. “The policy on the system and determination of the compensation for the director, etc.” is described only as “the amount is determined to be appropriate in consideration of the details of the duties of the director and the status of the company, etc.” The latest compensation committee’s activity is described only as “the compensation committee has been held three times.” It seems polarization has occurred in the companies’ response.

However, to delve deeper than such first impressions, it is important to be careful as to whether the disclosed information really enhances the transparency of compensation determination. Even company X mentioned above, after explaining indicators used for performance-based compensation determination in large numbers and in detail, only described the method of determining the amount by saying, “determined by the compensation committee in consideration of company performance, each director’s contribution, etc.” We need time to evaluate whether company’s disclosures are actually satisfactory to investors, by plugging indicator goal and result into the formula, and confirming consistency between the calculation result and the performance, for which each director is responsible.

I would like to point out some potential obstacles in this analysis, as the closing remark of this article. The compensation paid in the current term is based on the performance of the previous term. The compensation formula and its components are frequently reviewed and changed. Investors need to go back and forth between fiscal years to get information for calculations, to plug the previous index performance into the previous formula so as to validate the current compensation amount. An important point is likely to be whether investors can easily get enough information from the statement of securities reports, in order to do this.

Sachiko Ichikawa: Attorney at law in Japan and NY, USCPA. Live in Washington DC. Knowledgeable in employment law and corporate governance.

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