A government panel has proposed revising the Companies Law to make it mandatory for major firms to appoint at least one outside director (see below).
The Legislative Council, an advisory panel to the justice minister, finalized its outline for revising the Companies Law and three other laws at its general meeting on Thursday and submitted it to Justice Minister Takashi Yamashita.
The government will submit a bill to revise the Companies Law to an extraordinary Diet session scheduled for autumn, with the aim of having the law take effect in 2020.
The latest proposal is aimed at strengthening companies' ability to monitor their corporate management and corporate governance system.
According to the proposed outline, companies -- both listed and unlisted -- that meet all of the following conditions will be required to appoint at least one outside director:
-- Has a board of auditors and does not restrict share transfers
-- Has capital of at least 500 million yen or total liabilities of at least 20 billion yen
-- Is required to submit securities reports
The outline also includes the following recommendations:
-- The number of proposals made at shareholders meetings should be capped at 10
-- The board of directors should decide on and disclose specific methods for determining board members' pay
-- Minutes of shareholders meetings should be digitized
Effectiveness questioned
Currently, more than 90 percent of listed companies have already appointed external directors. However, the arrest of Carlos Ghosn, former chairman of Nissan Motor Co., has brought to light the failure of the automaker's outsider directors to detect acts of suspected misconduct.
In response, companies are being called upon to enhance the effectiveness of external directors.
Toshiba Corp., once regarded as a model of good corporate governance, was one of the first Japanese companies to appoint an external director.
However, the company failed to detect inappropriate accounting procedures in 2015 as well as huge losses in its U.S. nuclear power business the following year.
Some have pointed out that outside directors lack a thorough understanding of the financial situation of the company they are tasked with monitoring because they do not have access to enough inside information.
There is also a serious shortage of human resources capable of serving as outside directors.
According to ProNed Inc., a human resources consulting firm, only 30 percent of external directors for companies listed on the First Section of the Tokyo Stock Exchange have corporate management experience. Of the rest, 20 percent have worked for financial institutions; 20 percent are lawyers; 10 percent are former bureaucrats and 10 percent are academic experts.
Many serve as outside directors for several companies.
"I'm often asked to give my opinion based on my experience, including to offer a global perspective, but it's actually difficult to have a clear grasp of several companies' [financial] situations," said a person who serves as an external director for a major company.
The legislative revision will also apply to unlisted regional companies once they meet the given conditions, including the amount of capital funds. It will likely increase the difficulties regional corporate managers face in securing capable human resources.
-- Outside director
A person hired from outside the company who monitors the company's management from a third-person perspective. Outside directors do not engage in company business and thus are not constrained by business relationships. They are expected to speak for shareholders and their interests at board of directors meetings.
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