Questions to Ask When Engaging with Japanese Firms

Questions to Ask in Engagement

The increased focus on ESG has allowed certain firms to de-focus on “G” and appeal to all sorts of “ES” policies and plans in their IR materials.  This makes the job of investors harder in the sense that true sustainability and better financial performance are less likely to occur without good corporate governance in the first place, so one has to separate out the companies which are truly improving the quality of their governance in terms of its substance rather then just superficially assembling all the right boxes in the chart.

This is not easy to do, because old behavior patterns on Japanese boards are very hard to change. There is a strong preference for pre-scripted boards, and many directors “look to the CEO’s face” and sort of pander to him because they want to be re-nominated.  Then again, many Japanese directors are simply unused to free debate, new governance practice ideas, and know little about financial analysis.  Diversity and global experience are badly needed, as is director training generally, especially before internal directors (or new outside directors) join the board.  Improving the quality of boards is no easy task in Japan.

Speaking from many years of experience as an outside director in Japan, here are some example questions (or actions) that can help investors to identify how much corporate governance “substance” is really there, at any particular company.  BDTI’s GoToData database and data dashboard tool can be of help here.

  1. Look at the quality of public disclosure (yuho financial report), not just the integrated report. Depth, clarity? Or Just cut and pasted from last year?  Compare with past years. Is there a clear improvement trend?  How disclosure is available in English, and how soon?
  2. Ask to meet with an outside director. Try approaching that director first yourself, directly.  If you ask the company, it may not tell him or her, or may make excuses (e.g., by saying “he is too busy”).
  3. Do they have a robust compensation policy, with enough truly long-term, stock-related compensation?  Claw-back?  Do the directors own substantial stock? Do they give stock to outside directors?  Even among larger firms, this is done at only about 10% of companies.
  4. Write down the governance practices you would like all portfolio companies to adopt over time, and meet after sending
  5. Ask specific questions in writing and get answers.

Here are the sort of questions I suggest that you ask in writing:

  1. What issues does the board spend the most time discussing?  How do most agendas break down in terms of time allocation?
  2. What did you actually DO last yr re [diversity] [improving financial skills] [cap allocation] [sustainability] ?
  3. Exactly what sort of director and pre-director training was given last year?
  4. For how long (time) was each kind of training? ; what topics?; who took it?; given by whom?
  5. How long is an average board meeting? Committee meeting?
  6. How many times did the [nominations] committee meet last year? For about how many hours in total?
  7. Did you use an executive recruitment firm to find independent directors? How many candidates for outside directors did you interview this year?
  8. Your “independent” directors do not meet all of the TSE criteria. What exactly are those “relationships” that are noted as the reasons
  9. Why do none of your outside directors have experience in your (or a related) industry?  Without that, isn’t it hard to monitor executives?
  10. The TSE rule for stock trading units is “< 5,000 Yen”. Your stock is at 16,000 yen. Why do you not do a stock split? Has that been discussed by board?
  11. Why must the CEO be a member (not advisor) of the nom. committee? Do you discuss his performance, his preferred promotions, right in front of him?
  12. How many “advisors” do you have who formerly were directors?

The fewer clear and convincing answers you get, the less “corporate governance substance” is really there. 

Unfortunately, the “average” bar to exceed, is not necessarily that high. Consider the following results from METI surveys over the past two years or so:

  • The top issue/challenge for outside directors, as revealed in board self-evaluations, is “setting the long-term strategy”.
  • 34% think that there is not enough time allotted to discussion about the business portfolio, 24% believe that discussion is not leading to concrete results, and 10% say there is no debate at all (remember, these are self-admissions).
  • At 36% of firms, there is no discussion by the board about the mid-term plan.
  • 31% of outside directors have less than 3 years of experience as an outside director at any firm.
  • Only about 20% of firms are actually doing something to train or update outside directors.
  • Only 4.7% of outside directors have ever met with a shareholder on a one-on-one basis, even though “engagement” with shareholders is a duty under the CGC.
  • Even so, 76% “would be willing to engage with shareholders if asked”, and 10% are actually doing something in that regard, vs. 14% who “see no need for engagement”.
  • Board meetings were < 2 hours long at 61% of boards.
  • At 56% of firms, the “nominations” committee met <= 3 times per year, 41%, <= 2 times per year
  •        However, the vast majority of 3C firm nom committees met 5 or more times per year
  • Biggest problem for committees is the lack of information to evaluate qualifications of executives
  • Only 4.7% of outside directors have ever met with a shareholder on a one-on-one basis, even though “engagement” with shareholders is a duty under the CGC
  • 64% of outside directors spent less than 10 hours preparing for meetings each month (<5 hrs:32%)
  • Only 23% of outside directors place an emphasis on [appropriate] “risk taking” (e.g. proactive investment) as opposed to focusing on mainly “risk control” (77%)
  • When deciding to accept a position or not, for 22% “my relationship with mgt” was a major factor. For, 21%, their relationship with the company was “personal friend/acquaintance of CEO or directors”

If you have any questions, BDTI provides consulting for engagement and preparation for it.
Feel free to mail us at or .

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