Monday, February 06, 2012

Major Changes Proposed to Japanese Companies Act to Enhance Corporate Governance

A number of significant changes have been proposed to Japan’s Companies Act, many of which would enhance corporate governance, transparency and independence. Companies would have to appoint one or more independent directors and independent audit committees would be established. The audit committee would be composed of three members, with an independent majority.

In a letter to the Ministry of Justice, the International Corporate Governance Network, while applauding the proposal to require a minimum of one independent director, urged that companies be required to have a minimum one-third independent directors on their boards.. The ICGN believes that one of the principal features of a well governed corporation is the exercise by the board of directors of independent and objective judgment. In order to provide such judgment, reasoned the network, boards of directors of public companies must consist of a sufficient number of independent outside directors.

The ICGN also supports the proposal to amend the Companies Act to ensure the independence of outside directors. At the same time, the proposal does not cover affiliated companies or key business partners. In line with the response of the Asian Corporate Governance Association, the network asked the Ministry to review whether the proposal should also include a reference to affiliated companies or key business partners.

The consultation proposes a 10-year cooling-off period before an executive director, executive officer, or manager of the company or its subsidiaries can join the company’s board as an outside director. The ICGN stated that former employment with the same company can impact the independence of outside directors. However, the ICGN’s own corporate governance principles recognize that taking into account an appropriate cooling-off period can act as a counterbalance to former employment. Former employment can impact the independence of directors unless there is an appropriate period of years between the end of the executive role and joining the board.

Under the proposal, directors who are audit committee members must be elected separately from other directors by resolution of the Shareholders Meeting. Further, the dismissal of directors who are audit committee members must be by special resolution of a Shareholders Meeting. The compensation of audit committee members must be determined separately from the compensation of other directors.