business

Abe to urge companies to appoint more outside directors

27 Comments
By Ritsuko Ando

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Do you think Abe will also distribute a list of names of outside directors?

0 ( +2 / -2 )

Yet with around 40% of companies listed on Tokyo’s main bourse still filling their boards with insiders last year and under 3% appointing independent directors to a majority of seats, analysts say it will take years to see the sweeping change in governance which activist investors have long urged.

Wow. These numbers are startling. And, unfortunately, after what happened at Olympus, Japanese companies became even more reluctant to appoint outside directors. Abe stands no chance of gaining any meaningfull change. This is strictly a PR move. And foreign investment money will continue to bypass Japan.

3 ( +6 / -3 )

Japan didn't even know what the word governance was before Olympus

4 ( +7 / -3 )

I wish Abe luck, but my investments are short on Japan Inc. His chances of succeeding in a timely manner are somewhere between slim and none and even if he does manage to push through a palatable compromise it likely will not be enough to stave off the economic tailspin Japan has been in since the end of the bubble.

Decades of mismanagement might have a chance if Japan's population was young and on the verge, but as we all know the aging time bomb's fuse has already been lit and the 300%debt to GDP ratio is like barrels of diesel surround the pile of explosives.

I've taken my family and wealth back to the US, convinced my Japanese in laws to limit their exposure domestically and we re waiting for the inevitable, then we will return (10-20 years?) to help pick up the pieces and reinvent a young more nimble Japan Inc once the dinosaurs have been thrown out for their arrogance and chronic mismanagement.

For all those who remain, I wish you well and hope that I am wrong, but I also hope this process is not drawn out longer than necessary. The reforms needed are extreme, to put it lightly, and anything less is just a band aid on a mortal wound.

6 ( +7 / -1 )

Hahaha, yeap a big fight ahead for him....

1 ( +1 / -0 )

yeah right, and have all those dirty deals exposed, never going happen. Olympus is just the tip of the iceburg

4 ( +5 / -1 )

Real outside directors - not from the company's bank, not from fellow keirestsu members, not from retired directors...that's going to take a ing time to implement.

They'll need to form a committee, investigate the possibilities, review the conclusions, consider some actions, all of which guarantee no action will be taken...

7 ( +6 / -0 )

No, not from the company's bank, not from fellow keirestsu members, not from retired directors.

From the LDP and bureaucracy.

0 ( +2 / -2 )

Outside directors are money pits. They contribute nothing to the company or the shareholders, and take hundreds of millions of yen out of the shareholders equity.

Have you ever heard of any good story about outside directors? This is good news only for potential outside directors.

-8 ( +2 / -10 )

@Ch3CHO

How about Carlos Ghosn?

The problem isn't so much the lack of "outsider appointments", it's the age-old (pun intended) business practice in Japan of simply appointing "the next in line" regarding Japanese management. There's no young blood or fresh perspectives, just the same old guys running he country into the ground. What do they care? They just looking to make some coin before retirment.

You look at all the big companies making waves now, especially in tech, and it's a dynamic mix of young, female & multicultural leaders. None of which we'll ever see in Japan.

8 ( +8 / -0 )

Have you ever heard of any good story about outside directors? This is good news only for potential outside directors.

CH3CHO -- sure have, Olympus. The "inside" guys had cooked the books for over two decades, and in the process stolen millions of dollars in salaries paid by the shareholders, as well as artificially inflated the value of the stock.

Outside directors are money pits. They contribute nothing to the company or the shareholders, and take hundreds of millions of yen out of the shareholders equity.

And this comment just shows your ignorence of how outside directors work. Most Fortune 500 companies have their boards broken into several committees, like audit, compensation, etc. All of which have outside directors on them. And they make sure nothing shady is happening, which gives the shareholders the confidence needed to invest.

7 ( +10 / -3 )

@CH3CHO

Have you ever heard of any good story about outside directors? This is good news only for potential outside directors.

I think you might misunderstand the role of outside directors. They are not whistleblowers. They raise their concerns as problems arise so that the company can change course before things get the chance to blow up into a scandal that we all hear about. If an outside director does their job well, you will never hear about it. You are asking us to prove a negative with your question.

Whether Japanese cuture is fundamentally incompatable with the role that outside directors are expected to play, that is a legitimate question.

Outside directors are money pits.

In the US, executive salaries across the board are out of control, no doubt about it. In the UK however, non executive directors earn about 50,000 to 75,000 pounds on the top half of the biggest listed companies. 25,000 pounds on the bottom half. They don't cost millions.

Glad to see everyone is generally on the same page and understands the issues well.

9 ( +9 / -0 )

The three outside directors on Olympus Corp’s former board, for example, failed to detect a scheme to hide investment losses relating to a $1.7 billion accounting scandal in 2011.

Possibly then, it's not actually quantity of directors, but quality that is important?

(I admit to having little knowledge about corporate governance, but if 3 outside directors proved to be useless then I wonder how having 5 for example, would help?)

1 ( +1 / -0 )

And next Abe(or his cronies) will also want to have approval authority for prospective board appointees.

-1 ( +2 / -3 )

Possibly then, it's not actually quantity of directors, but quality that is important?

Thats very true. The outside directors need to be ready to probe and press the other board members to make sure that they are fully aware of what the company is up to. This is not an easy job if it is done properly.

One of the other problems that exists in Japan and the US is that the chairman of the board and the chief executive can be the same person! This is truly a recipe for disaster. The two most imporatant and influencial roles in a company should be held by two seperate people so that the chairman cannot just rubberstamp what he is doing as CEO.

4 ( +4 / -0 )

Possibly then, it's not actually quantity of directors, but quality that is important?

I think this is an important point, along with access to information for those directors. Enron for example had a ton of independent directors but they weren`t particularly active in overseeing the company and it was easy for executives to keep information from them.

For this reason, I think that simply mandating more independent directors for Japanese companies isnt going to do much. Actually the article is a bit misleading in this regard anyway. The Japanese Companies Act doesnt require independent or outside directors for most firms, but the Tokyo Stock Exchange listing rules do, so most large Japanese companies already have at least one independent director, but there doesn`t seem to be much correlation with having these outsiders and actual firm performance.

2 ( +2 / -0 )

Conventional wisdom holds that corporate boards, particularly outside directors, must do a better job of earning their fees and take a more active role in the oversight of companies they hold in trust for the stockholders.

0 ( +0 / -0 )

@senseiman

but there doesn`t seem to be much correlation with having these outsiders and actual firm performance.

This may be true but I think its generally accepted that outsiders are not there to inject new profitable ideas to boost firm performance. Their role is primarily one of oversight. And again, we can never truly know what disasters have been averted by the intervention of outside directors. Their contributions in saving the company from making stupid decisions are not written up in the annual report for obvious reasons. It is just taken as common sense that a mix of insiders and outsiders is a good thing.. we can't prove or disprove this by looking at the accounts.

1 ( +1 / -0 )

Lets face Japan Inc has a LOT more ghosts in their closets that they don't want found, accounting here is often the equivalent of a black hole!

Can you just imagine the scandals that are being hidden now & for how long they have been, no way in hell does Japan Inc want outside directors probing their insides!!!

0 ( +1 / -1 )

sighclopsMay. 19, 2014 - 11:20AM JST

How about Carlos Ghosn?

He is not an outside director. He was the president of Nissan and is now the chairman, therefore, he is an inside director.

jerseyboyMay. 19, 2014 - 11:22AM JST

CH3CHO -- sure have, Olympus.

The president of Olympus was not an outside director. A president of a company is, by definition, an inside director.

Folks, why do we spell out the definition of an outside director. An outside director is a director who has no other office in the company than a director. So, a chairman, a president, an exectutive, or a manager is not an outside director but an inside director. An outside director is a part-time job who usually works a few hours every month or so, when a board meeting is convened.

3 ( +3 / -0 )

I can see it now - "outside" director we be interpreted as "different company, same kiretsu."

1 ( +1 / -0 )

SumoBobMay. 19, 2014 - 01:23PM JST

I can see it now - "outside" director we be interpreted as "different company, same kiretsu."

Today, most of the outside directors in Japan are retired regulators, lawyers, accountants, tax consultants, retired prosecutors, and professors.

2 ( +2 / -0 )

An outside director is a director who has no other office in the company than a director. So, a chairman, a president, an exectutive, or a manager is not an outside director but an inside director. An outside director is a part-time job who usually works a few hours every month or so, when a board meeting is convened.

This is all correct. (Maybe the term NED, non-executive director, which they use in other parts of the world is probably a better label.)

However I think the governance problems in Japan are very cultural and run so deep that the true distinction between inside/outside is as much of a cultural issue as the legal definition of an outside director/NED hence the Ghosn and Woodford examples are very relevant.

2 ( +2 / -0 )

Today, most of the outside directors in Japan are retired regulators, lawyers, accountants, tax consultants, retired prosecutors, and professors.

None of these are outside directors. Business in Japan is based upon "relationships", and these relationships do not involve outsiders of any kind. The retired regulators are given positions after their retirement in exchange for favors they granted before their retirement. The other parties mentioned are also not outsiders, but people who have had long relationships with the companies they supposedly direct. They do what the board tells them to do, or they risk their positions.

Japan is all about knowing one's place. The boss is always right, even if he tells you that it snows in Tokyo in August. You don't have to believe him, but you never dare to correct or contradict him. Companies will never endure directors who correct or contradict the other members of the board, or the chairman, it simply isn't done.

Cerberus invested a lot of money in Seibu, and saved the company from insolvency. Their hope was to make Seibu into a more efficient and profitable company, and so earn a good return on their investmen. But despite having their positions saved by Cerberus' investment, Seibu refused to give Cerberus a voice on the board, or in the company, and resisted all efforts to improve the company.

This glaring example of ingratitude was heard very clearly by investors in New York and London. Abe's call for foreign investment in Japan has met only laughter from these places. Why bother to invest money in Japan if you have no say in how your money is used?

6 ( +6 / -0 )

None of these are outside directors. Business in Japan is based upon "relationships", and these relationships do not involve outsiders of any kind.

This comment really hits the nail on the head!

The question with outside directors is surely 'what are we trying to get outside of?'. In Japan, its not just the potential rot of the individual company, but the the rot of the entire old boys network.... appointing a retired director from another conglomerate isn't going to inspire confidence with small shareholders. Japanese institutional shareholders on the other hand, couldn't care less.

2 ( +2 / -0 )

@sangetsu03

Fascinating! Thanks for that! Could you point us in the direction of further reading? :)

1 ( +1 / -0 )

Example of a corporation that had outside executives. Sony.

1 ( +1 / -0 )

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