Mizuho Financial Group Inc. is doing away with the kind of opaque leadership selection process that’s common in the nation, vowing to ensure its next chief executive is chosen openly and fairly.

The successor to CEO Yasuhiro Sato will be determined by a group of external directors rather than past leaders, said Hiroko Ota, chairman of the board of Japan’s third-largest lender by market value. The former economy minister is one of four outsiders who sit on the nomination panel that Tokyo-based Mizuho set up as part of a three-committee governance system in 2014.

Mizuho became one of the few Japanese firms to adopt such a model for oversight after it sought to bolster transparency and supervision following years of regulatory infractions and criticism for internal factionalism. Prime Minister Shinzo Abe is pushing firms to improve governance and cater more to shareholder interests, including by opening up how they choose leaders and elevating more women to management roles.

While the nomination committee may prove unpopular with top executives, Mizuho needs to make sure it truly functions, said Ota, who became one of the highest-ranking women in the Japanese financial industry when she took her post in June 2014.

“CEOs chosen by it will be stronger,” Ota, 61, said. “The committee is instrumental for removing the hard-to-track influence of those who have already stepped down from top management.”

Although 63-year-old Sato has not signaled any plans to leave the post that he took in 2011, Mizuho, like most Japanese banks, changes its top executives every few years. Ota said the debate over his successor has begun and the selection process will take time.

“We’re asking who’d be best suited to follow Mr. Sato and what kind of people are on the long list of candidates,” Ota said. Former CEOs “have no avenue of direct influence,” she added.

The path to promotion at Mizuho used to involve navigating power shared by cliques left over from the three banks that merged to form the financial group about 15 years ago, according to Kazuhiko Toyama, who has helped turnaround Japanese household names from Kanebo Ltd. to Japan Airlines Co.

“Employees would try to maximize the power of their factions, and those who were the most successful would be promoted,” said Toyama, now CEO of Industrial Growth Platform Inc., a management consultant. “People didn’t really care whether the company was increasing value, and were becoming numb to societal standards outside their bubble.” Mizuho’s corporate structure has since become much more respectable, at least in appearance, he added.

In 2013, after it emerged that an affiliate extended ¥200 million in credit to members of crime groups, Mizuho’s chairman at the time stepped down, and the company later formed the nomination, remuneration and audit committees to choose its top executives, decide their pay and supervise operations.

The first two groups consist entirely of external directors. The nomination panel is headed by Mitsuo Ohashi, a former CEO of Showa Denko KK, a maker of petrochemical products. The other members are Ota, a former supreme court justice, and a previous CEO of Hitachi Ltd.

Ota is among the few outside directors to serve as chairman of a Japanese company. As of July, only 17 out of 3,474 listed firms have taken this approach, according to the Tokyo Stock Exchange.

A group led by the Financial Services Agency is now assessing the progress made by Japanese companies to improve practices since a corporate governance code came into effect last June.

Only 1.8 percent of domestic companies listed in Japan employed a three-committee system in 2015, while 4.5 percent had a supervisory panel, TSE data show. The number of companies with at least one outside director has increased by 39 percentage points over the past three years, on the first section of the exchange.

Japan’s other two so-called mega-banks have also bolstered governance. Mitsubishi UFJ Financial Group Inc., the nation’s biggest lender, last year joined Mizuho in forming a three-committee system. Sumitomo Mitsui Financial Group Inc. has a nomination panel among its four internal committees, and outside directors have been appointed to these, according to its website.

Japan’s governance reforms have made a good start, yet more can be done to boost long-term profitability, said Ota, who was economy minister from 2006 to 2008 and is now a professor at the National Graduate Institute for Policy Studies in Tokyo. One area that Mizuho should tackle is how it assesses its employees, she said.

The traditional evaluation method at Japanese financial firms records employees’ mistakes without explicitly recognizing their successes, which discourages younger workers and wastes their talents, said Ota. Firms also should scrap a promotion system whereby when one employee reaches a certain senior rank others who joined the company in the same year must transfer to a subsidiary, she said.

“You won’t get anyone who stands out” under the current system, Ota said. “All of us external directors think this. Change has to happen.”

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.