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Corporate governance reforms are gradually starting

Takuma Naito, Management Consulting Department

Mar. 27, 2017

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In June 2015, the Tokyo Stock Exchange started application of a corporate governance code. Takuma Naito of the NRI Management Consulting Division feels that this has given listed companies in Japan an opportunity to enact suitable corporate governance reforms that take global standards into account. We asked Naito what this code is and about the current situation of corporate governance reforms at Japanese companies.

Check points for governance reforms

――What is a corporate governance code?

To put it simply, it is a checklist for implementing corporate governance reforms. Corporate governance is a system for governing a company, and includes rules for management, organizational operation, and information disclosure. In particular, Japanese companies operating in the global market are required to implement governance that considers global standards. The corporate governance code enables companies to check how they think about corporate governance and what initiatives they need to take. The code currently includes 73 items.

――Are Japanese companies utilizing the code to implement reforms?

The corporate governance code was originally formulated as part of the Japan Revitalization Strategy created by JapaneseAbe Cabinet. Application of the code is not mandatory and companies are required to decide whether to implement governance reforms based on the situation they are in. However, companies operating in the global capital market need to at least declare their basic view on corporate governance.

From passive to proactive governance reforms

――Have Japanese companies been involved in governance reforms in the past?

Yes, some companies have implemented governance reforms in the past. In 2004, the Tokyo Stock Exchange also formulated the Principles of Corporate Governance. However, most past governance has been passive governance that focused on legal compliance and risk evasion. The idea was to ensure sustainable corporate growth by establishing a system that enables stockholders to replace managers that make mistakes or take reckless actions.

――Will future governance reforms differ from the past?

Yes, they will differ greatly. Reforms will enable proactive governance. Effectively utilizing the formulated corporate governance code will encourage managers to proactively take risks and implement reforms that will enhance the ability of Japanese companies to earn money. In order to increase overseas sales and develop new products and services, companies must change the way that they create corporate value. Governance reforms enable companies to achieve this by reexamining their structures and creating systems for autonomously growing and evolving.

80% of companies have appointed independent outside directors

――It has been more than a year since the code was applied, but have changes occurred in companies?

Since the code was made applicable in June 2015, companies listed on the Tokyo Stock Exchange were required to disclose their company's position on 11 of the 73 items in the code within six months of their stockholders' meeting. I believe that companies are using this opportunity to start reforms. One significant change has been the number of listed companies with two or more independent outside directors, which increased from 20% to 80% in a year. I think that companies having two or more directors that can vote against the president when making decisions on the management strategy and business model will have an impact on future governance reforms.

Although governance is gradually changing due to the application of the code, initiatives for improving corporate value are not yet being implemented


(*1) Calculated by NRI from the Bank of Japan Flow of Funds (2015)

(*2) Ratio of companies that published ROE targets out of the 121 companies that published mid-term management plans between January 2015 and June 2015

*Other sources: "How Listed Companies Have Addressed Japan’s Corporate Governance Code" by the Tokyo Stock Exchange on January 20, 2016

――What specific changes will be made due to governance reforms?

For example, Resona Holdings, Inc., which received public funds in 2003, implemented widescale reforms to its directors and upper management to transform into a banking group in the financial service business, while also achieving services for customer convenience, such as extending business hours to 17:00 on weekdays and a 24-hour call center. The public funds were paid off earlier than expected, in 2015. The competence of new directors from other industries and the new system that appointed former managers in the manufacturing, retail, and service industries as outside directors largely contributed to the success of these reforms. I believe this case is a good example of the new business models and creation of corporate value that can be achieved with governance reform.

Essential for creating new corporate value

――Do governance reforms take time?

That is the difficult part. Corporate governance reforms do not show immediate results and require quite a large effort and commitment from upper management, including executives and outside directors. At any rate, upper management must have a sense of ownership in order to generate new corporate value.

――Does the corporate governance code perspective help?

Yes. The application of the code can be taken as an opportunity to overhaul the company governance and assign priorities for what to start first. For example, if a company's goal is to expand their ratio of overseas sales to over 50% in 10 years' time, it will become easier for the company to identify issues with current governance and the reforms necessary for achieving their business model by referring to the code. I believe that creating an opportunity for upper management—including outside directors—to discuss the basic concept of governance will be the starting point for everything.

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Nomura Research Institute, Ltd.
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