Japan is changing from a society tightly ruled by proactive laws into one where economic activities are supervised only on a retrospective basis. This is the result of progress in administrative and fiscal reforms, and it is one reason behind the proposal to overhaul the judicial system.

The ongoing series of changes to the Commercial Code is also aimed at easing governmental regulations. However, I would like to warn here that some people are beginning to call for reversing the trend.

As exemplified by cases in Britain, France and Germany, the world has witnessed substantial moves toward easing Commercial Code regulations.

In the United States, the Commercial Code was less enforcement-based in nature from the very beginning. Japan, meanwhile, has been left to lag behind a global trend in which governments have been easing regulations to allow freer corporate activities and to allow companies to survive intensifying international competition.

It was only recently that the Diet enacted legal changes allowing stock swaps or corporate spinoffs — options essential to companies’ efforts to reorganize. The spinoff system just went into effect April 1. These options were widely established long ago in other industrialized countries, and it is only natural that Japan has finally embarked on its own fundamental reforms of the code.

A recent package of draft proposals by the Justice Ministry’s Legislative Council, released after half a year of discussion, calls for far-reaching reforms to the Commercial Code ranging from changes in the stock system and corporate institutions to rules on corporate accounting and disclosure.

However, I have to raise questions about some proposals that appear to run counter to the global trend of deregulation. These include a new rule obliging major corporations to appoint outside members to their management boards, as well as requirements that share issues for third-party allotments and stake selloffs in key affiliates be approved by shareholder meetings.

The Japan Federation of Economic Organizations (Keidanren) immediately released a statement opposing the plans, and we cannot understand why the U.S. government appears to be backing such problematic proposals. Keidanren is not opposed to the very system of appointing people outside the company as members of its board, but to the proposal of forcing major companies to do so.

Forcing such a rule onto privately held companies, which account for 6,500 of the nation’s 10,000 major corporations as defined in the Commercial Code, is especially illogical. In fact, U.S. rules require firms to appoint outside board members only when they go public.

The U.S. government has proposed that Japan apply the Justice Ministry’s new rules only to public companies, but before it intervenes in the regulatory debates of other countries, the U.S. should first review its own system, which promotes a race for the bottom among states vying to lure investment with changes to their commercial laws.

The support has been so surprising that I am even tempted to speculate that proponents of the proposed system are in fact U.S.-affiliated consultants or lawyers who are seeking to turn the rules into new business opportunities for themselves, or simply people who are trying to deprive Japanese companies of their competitive vigor.

Proponents of the system say appointing an outside board member will improve Japanese firms’ internal supervisory functions because an outside board member, unlike an auditor, will have the power to relieve a chief executive officer of his or her post.

But this reasoning appears flawed, because in the case of U.S. firms, outside board members can oust CEOs only when they are backed by institutional investors. It is fruitless to debate which of the two — the outside board members or the auditors — is better suited to supervising the company’s operations, and the judgment should be left to financial markets or to the firms themselves.

As we pursue better corporate governance, it is the mind-set of corporate executives, rather than the systems that bind them, that matters. The arguments behind the proposal for outside board members are reminiscent of the old school of economic thought — that all business activities should be controlled by advance regulations.

We must be on guard to prevent a movement toward tighter regulatory measures from creeping up on us.

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