METRICAL: Study on Committees

Over the past year, an increasing number of companies have set up nomination and compensation committees. In order to improve transparency and objectivity and considering the continuity of management, establishing these committees is a key issue in enhancing corporate governance. Due to the request of the Tokyo Stock Exchange, many companies have moved to set up advisory committees lately. On the other hand, only a limited number of companies have moved to the organization structure of a company with 3 statutory committees for the same period.

Based on the data of approximately 1,800 companies, we will show how far companies have progressed in setting up the committees for the past 2 years since March 2018. As shown the chart below, compared to March 2018 and April 2020, the number of companies with statutory nominating committee and compensation committee increased modestly from 65 companies/all 1,796 companies to 68 companies/all 1,753 companies in total. It obviously shows how difficult the companies consider moving to the structure with 3 statutory committees. On the other hand, as for the optional (advisory) committees, an increasing number of companies have set up the nomination committee and compensation committee. The number of companies with optional (advisory) nomination committee increased from 550 companies /1,731 companies (31.8% of all companies excluding the companies with structure having 3 statutory committees) as of March 2018 to 949 companies/1,685 (56.3% of all companies excluding the companies with structure having 3 statutory committees as of April 2020. Similarly, the number of companies with optional (advisory) compensation committee increased from 609 companies/1,731 companies (35.2% of all companies excluding the companies with structure having 3 statutory committees) as of March 2018 to 992 companies/1,685 companies (58.9% of all companies excluding the companies with structure having 3 statutory committees) as of April 2020.

Let’s take a closer look at each committee about the members structure and chairperson. In the nomination committee of the company with statutory 3 committees, the number of companies that appointed outside director as chairperson increased from 45 companies/65 companies with the company structure having 3 statutory committees (69.2% of all companies with the company structure having 3 statutory committees) as of March 2018 to 56 companies/68 companies with the company structure having 3 statutory committees (82.4% of all companies with the company structure having 3 statutory committees) as of April 2020. Likewise, the number of companies that appointed outside director as chairperson of the compensation committee of the companies with 3 statutory committees increased from 49 companies/65 companies with the company structure having 3 statutory committees (75.4% of all companies with the company structure having 3 statutory committees) as of March 2018 to 56 companies/68 companies with the company structure having 3 statutory committees (82.4% of all companies with the company structure having 3 statutory committees) as of April 2020. As for the optional (advisory) nomination committees that an increasing number of companies established optional (advisory) nomination committee lately, the number of companies that outside directors account for >50% of the committee members and serve the chairperson remained less than half respectively as of March 2018, but rose to more than half as of April 2020. Like this, the number of companies that outside directors account for >50% of the optional (advisory) compensation committee members and serve the chairperson remained less than half respectively as of March 2018 but rose to more than half as of April 2020. Compared to the compensation committee, the progress on the nomination committee is still lagging. Please see detail data in the table below.

An increasing number of companies are likely to establish the optional (advisory) committees going forward as there are still many companies that haven’t established the committees in Japan’s public companies. However, considering that many of the committees are advisory committees, the effectiveness such as transparency of the decision making remains uncertain. Even for a company having 3 statutory committees, it is presumed that the effectiveness would vary depending on the actual operation of the committees in each company. We strongly expect the board evaluation to include and improve the evaluation of the committees. Also, we expect the companies to disclose such information in the board evaluation proactively. However, as far as the disclosure information, it seems that many companies don’t get around to doing the board evaluation well.

Please see detail in the following link.
http://www.metrical.co.jp/
Please feel free to contact the below email address if any interest or query.

Aki Matsumoto, CFA
Executive Director
Metrical Inc.
akimatsumoto@metrical.co.jp
http://www.metrical.co.jp/jp-home/

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