Firms face call for outside directors

METI panel looking for ways to tighten corporate governance rules amid stock-market slump

by Shigeru Sato and Tomoko Yamazaki


The government may require publicly traded companies to hire outside directors to enhance corporate governance standards as the Nikkei average trades near two-decade lows.

A 20-member panel led by the Ministry of Economy, Trade and Industry aims to unveil a plan in June that will urge changes to corporate law or listing rules, according to Hiroaki Niihara, director of METI’s Corporate System Division.

The Justice Ministry and the stock exchanges are prepared to take action to enforce the recommendations once the report is completed, Niihara said.

“The issue of Japan’s corporate governance has been left untouched for a long time,” he said Friday. “Our major goal is to come up with a framework that would protect minority shareholders of listed companies, where Japan has been very weak.”

Regulators are urging companies to improve governance standards to attract capital after the global credit crisis damaged corporate earnings, pushing the Nikkei average to 7,054.98 on March 10, the lowest close since October 1982.

Finance ministers and central bankers from the Group of 20 nations called over the weekend for governments to support improved governance, dividend policy restrictions and executive pay caps.

METI formed the panel in December. It includes officials from Canon Inc., the Tokyo Stock Exchange and Pension Fund Association. The move came in response to criticism from overseas investors, including the California Public Employees’ Retirement System, or Calpers, who said failure to meet global standards would discourage investment in the world’s second-largest stock market.

Foreign investors account for more than half of all trading in Japanese stocks. They have been net sellers every week this year except for the week that ended Jan. 9, according to data compiled by exchanges. In the week that ended March 6, the investors sold a net ¥557 billion, the sixth-most ever.

Japan’s publicly traded companies are currently not required to hire independent directors. Managerial oversight is left to auditors.

While the absence of directors, including outside board members, gives more power to shareholders, it can create a problem if management seeks control over the shareholder-base by creating so-called stable investors through cross-shareholdings, a practice in which friendly companies buy stakes in each other’s businesses to cement ties, Niihara argued.

The vague definition of outside director also needs to be addressed, Niihara said. Japan allows parent companies to send executives to their subsidiaries as “outside” members of the board.

Outside board members are required in the U.S. and U.K.

Niihara, one of the first Japanese bureaucrats to address governance issues, argues that corporate governance standards in the U.K. are effective because they give more rights to the shareholders.

In the U.K., shareholders have the right to vote on both dividends and charter changes. In the U.S., decisions on dividends aren’t taken at shareholders’ meetings, and U.S. stakeholders only possess veto power when the board makes proposals for charter changes.

In a time of global turmoil, better corporate governance practices are crucial for boosting corporate value and attracting investors, Niihara said. The International Monetary Fund predicts the first global contraction in six decades this year.

“When the economy is growing, insufficient corporate governance tends to create fewer problems because companies can afford to pay dividends and still have enough money for research and development,” Niihara said.

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