Ministry of Economy, Trade and Industry
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Announcement of the Interim Report and the Guidelines Compiled by the Corporate Governance System Study Group

In March 2012, the Ministry of Economy, Trade and Industry (METI) established a Corporate Governance System Study Group (hereinafter referred to as the “study group”) chaired by Mr. Hideki Kanda, professor at the University of Tokyo Graduate Schools for Law and Politics/Faculty of Law, and since then, the study group has been holding meetings to consider issues on the expected roles of non-executives including outside directors and Audit & Supervisory Board Members (Kansayaku) and to discuss ideal approaches to creating corporate systems in a broad sense.

Taking the opportunity provided by the revision of the Companies Act, the study group has compiled the findings of the meetings into an “Interim Report on the Roles of and Support System for Non-Executives including Outside Directors and Kansayaku”, and “Guidelines on Outside Directors and Kansayaku”. METI hereby announces them.

1. Background

In recent years, Japan has been studying the issue of promoting the introduction of outside directors to companies including revision of the Companies Act and other necessary measures. In March 2012, METI established a study group to consider the roles expected of non-executives including outside directors and Audit & Supervisory Board Members (Kansayaku), a necessary first step for such study and since then the study group has held eight meetings.

On June 20, 2014, the Revised Companies Act was enacted during the 186th ordinary Diet session, aiming to promote the introduction of outside directors into companies. In response, it is expected that Japanese companies will further accelerate efforts for introducing their outside directors. In addition, the Study Group for Creating Japan's Earning Power discussed issues related to how Japan will be able to create a mid- to long-term structure of a virtuous economic cycle, and compiled the findings into an interim summary. The interim summary states that Japan should consider the ideal approaches to utilizing outside directors in companies to improve companies’ governance.

To achieve this goal, the study group decided to discuss expected roles of non-executives including outside directors and Audit & Supervisory Board Members (Kansayaku) as well as ideal approaches to a support system that companies should develop under which such non-executives are able to play their roles, which have not always been clearly defined, and compile the results of the discussions into an interim report, including case examples of outside directors that successfully play their roles. This interim report aims to be a reference when companies endeavor to introduce outside directors or when such outside directors serve in their roles.

2. Outline of the interim report and the guidelines

Interim report

  1. Concerning the roles expected of outside directors and Audit & Supervisory Board Members (Kansayaku) and a support system provided by companies, the study group compiled Best Practices of Japanese companies’ into a collection so as to provide a practical reference, clearly and comprehensively describing expected roles and a support system.

  2. Concerning the practice of outside directors, the study group disclosed the actual practice of how outside directors successfully play their roles. For example, some companies succeeded in preventing negative impacts on companies’ management, such as misconduct, and others successfully encouraged determination on strategic investments and other aspects, leading to positive impacts. In addition, the interim report introduces some specific examples of outside directors involved in decision of nomination and compensation.

    Furthermore, such examples show that in some companies, outside directors provide advice to top management, and in others, such directors serve a function of monitoring top management by checking them in view point of compliance or determining the validity of management decisions.

    Accordingly, under the laws and regulations, the role of outside directors is simply described as “supervising,” but the examples show that in practical situations, there are a variety of roles that such directors successfully play.

  3. Among the various, potential roles of outside directors, the criteria that companies weigh more heavily when they decide which roles are important, which roles they should choose and how they select outside directors depend on the companies’ characteristics and management strategies.

    To address this situation, the interim report requests companies, even those that have introduced outside directors, to proactively communicate information on the ideas concerning the introduction of outside directors and on the roles that they expect such directors to play to the public (namely, the “Comply AND Explain” approach).

  4. The interim report also highlights Audit & Supervisory Board Members (Kansayaku) who will play an important role as non-executives, as well as the roles of outside directors. In this context, the interim report introduces an example of an Audit & Supervisory Board Members (Kansayaku) who succeeded in not only determining the legality of top management decisions but also their appropriateness, and shows another example of an Audit & Supervisory Board Members (Kansayaku) who executes legal power over the management, which reveals that there are cases where Audit & Supervisory Board Members (Kansayaku) are playing roles in a variety of fields and executing their capability effectively.

  5. Concerning the support system for outside directors and Audit & Supervisory Board Members (Kansayaku) provided by companies, in addition to the significance of providing support systems for them including providing such officers with staff and funds for their activities, the interim report also discloses the importance of conveying information to them (considering the fact that such officers have little information and smaller human networks in the company than those who are original members of the company), as well as the importance of ensuring that meetings of the board are conducive to allowing even outside directors and Audit & Supervisory Board Members (Kansayaku) to state their views and contribute to the companies, collaboration of outside directors and Audit & Supervisory Board Members (Kansayaku).

Guidelines

  1. While the interim report is characterized by a collection of Best Practices of outside directors and Audit & Supervisory Board Members (Kansayaku) and implications developed from the practices, the study group also compiled a summary of the interim report into another report titled “Guidelines on Outside Directors and Kansayaku,” aiming for readers to be able to refer to and utilize it in introducing outside directors and Audit & Supervisory Board Members (Kansayaku). The guidelines only present excerpts of the implications described in the interim report, namely, matters that companies should consider when introducing and utilizing outside directors and Audit & Supervisory Board Members (Kansayaku), so that companies are able to quickly refer to the guidelines in the following cases:

    • [i] When non-executives including outside directors execute their duties;
    • [ii] When companies, especially top managements, consider the election of outside directors; and
    • [iii] When companies intend to utilize outside directors and Audit & Supervisory Board Members (Kansayaku) who have already been introduced or are to be introduced.

    METI expects that the guidelines will serve as a tool for companies, outside directors and Audit & Supervisory Board Members (Kansayaku) to establish an effective corporate governance system which is appropriate for their companies.

References

Release Date

June 30, 2014

Division in Charge

Corporate System Division, Economic and Industrial Policy Bureau

Ministry of Economy, Trade and Industry
1-3-1 Kasumigaseki, Chiyoda-ku, Tokyo 100-8901, Japan Tel: +81-(0)3-3501-1511
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