Bringing governance in line with international standards

Japan’s Ministry of Justice has sought public comment on its Interim Proposal to revise the country’s Companies Act., including seeking input from non-Japanese institutional investors. I was pleased to serve as the first member from the global investment community on the Ministry’s Legislative Council. We welcome the opportunity to respond to the proposals, as well as the Ministry’s positive initiatives.

The proposed changes establish a timeframe for informing shareholders of meetings and clarify the duties of outside directors on corporate boards.

Japanese business associations and lobbying groups, including the influential Japan Business Federation, would like to preserve the status quo, and oppose the proposed revisions. But we believe such regulatory revisions enhance the minimum standards for companies and would help bring Japan’s corporate governance in line with global standards.

We strongly support establishing the proposed new rule to utilise outside directors, to help ensure an independent process to determine a fair bidding price in a management buyout situation. It has not been traditional practice for independent directors to be involved in board decision-making around such buyouts in Japan, which can give rise to serious conflicts of interest.

Improving information disclosure to shareholders will improve governance

We also strongly support the proposed revisions to enhance disclosure of information. It is essential for shareholders to determine the appropriateness of directors’ remuneration linked to company performance. The revised clause requires companies to improve transparency and accountability of directors’ remuneration by disclosing such information as policy, allotment, key performance indicators (KPIs) and performance-based calculation methods.

We strongly support addition of a new clause to enable shareholders to receive notice and access shareholders’ meeting materials electronically, four weeks prior to the date of the meeting, that I proposed to the council to consider. If companies can send information by the proposed new method via the Financial Service Agency’s EDINET, before printing, addressing and mailing the materials, shareholders should be able to receive it much earlier.

We also support notifying shareholders that a meeting has been called four weeks prior to the date of the meeting. Under the current law, this notice is printed on paper and the material must be physically delivered to each shareholder, which is a cumbersome and old-fashioned process. While the law stipulates that the material be sent to shareholders two weeks prior to the meeting, in practice, it is usually sent three weeks prior on average by voluntary progressive efforts by companies. An additional week would be a slightly challenging hurdle, but we believe companies’ creativity, innovation and technology should provide solutions to shorten the lead time for the preparation period.

Finally, we believe that shareholders should be limited to each making five proposals, including two proposals concerning appointments and/or dismissals of management. This is sufficient to preserve shareholders’ rights while helping to sharpen more important proposals and reduce the number of irrelevant or confusing proposals that sometimes waste time during the peak season of shareholders meetings.