Business

New law strengthens independent checks on major firms in Japan

In wake of Ghosn ouster, companies must have outside directors, clarify executive pay

JIJI, Staff Report

Following the high-profile corporate governance scandal at Nissan Motor Co., the Diet on Wednesday passed a law to strengthen independent checks on major listed firms by obliging them to have outsiders on their board of directors and make executive compensation more transparent.

The House of Councilors approved the bill to amend the Companies Act by a majority vote with support from the ruling Liberal Democratic Party, its coalition partner, Komeito, and opposition parties including the Constitutional Democratic Party of Japan and the Democratic Party for the People.

The bill was approved by the House of Representatives late last month. Although most large companies listed on the Tokyo Stock Exchange’s first section already have outside directors, the government hopes to reinforce corporate governance by making the practice law.

The revised law is also designed to increase transparency in executive compensation at major companies in the wake of the ouster of Nissan Chairman Carlos Ghosn, who was arrested last year for allegedly understating his compensation. He has continued to deny allegations of financial misconduct.

Boards of directors will now be required to disclose outlines of executive pay, such as whether it is offered in cash or shares and in a fixed or variable amount.

Another new provision urges firms to clarify how they will cover costs for potential lawsuits targeting their executives, such as lawyer fees and damages.

Rules related to general meetings of shareholders were also changed. The revised law allows companies to send documents related to the meetings in electronic form and also limits the number of proposals a shareholder can submit to 10 in principle.

The government’s draft bill had included a provision enabling companies to reject abusive proposals that were defamatory or sabotaged shareholders meetings. But the provision was deleted after the opposition side said it would be difficult to judge whether proposals amounted to an abusive exercise of shareholders’ rights.

Large companies that meet certain criteria such as having capital of over ¥500 million or liabilities of at least ¥20 billion would be subject to the law. Excluding a provision for electronic documents for shareholders meetings, the revised law is set to take effect by June 2021.