Lately japanese corporate governance structures and

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Lately, Japanese corporate governance structures and board composition have been subject to intense criticism. In some respects, its corporate governance lags that of some emerging Asian economies, such as China, India and South Korea. For example, in 2013 about 600 of 1,400 listed Japanese firms did not have a single outside director, whereas China, India and South Korea all require them. By contrast, for U.S. companies listed on the New York Stock Exchange, outside directors must comprise more than half of the board. In Japan, only a handful of companies have at least three outside directors, Toshiba being one of them. Irrespective of their presence, in general the outside directors in Japan wield very little influence. For example, commenting on the role of the outside directors at Olympus, ex-CEO Michael Woodford likened them to “children in a classroom , totally obedient to the company’s chairman of the board (Woodford 2012). In order to lure global funds to invest in Japan, the government of Prime Minister Shinzo Abe proposed a set of policy imperatives in 2014, popularly known as Abenomics. A key pillar of Abenomics was the corporate governance code. Though the code is voluntary, it is being be widely adopted, perhaps because companies will be required to explain their non-compliance with the code. 13 As of July 2017, approximately 26% of companies listed on the Tokyo Stock Exchange were in full compliance with the code, up from approximately 20% in December 2016. 13 This is similar to the legislative tactic adopted in the Sarbanes-Oxley Act that requires companies to either adopt a code of ethics for senior financial officers or provide reasons for not doing so.
20 Approximately 89% of companies were in compliance with 90% or more of the code’s principles (JPX Tokyo Stock Exchange 2017). The code empowers shareholders and encourages them to voice their opinion when needed. However, not everyone or every corporation in Japan has accepted Abenomics. Japan’s powerful business lobby, Keidanren , has stonewalled the reforms. Among Keidanren members, Canon has been the most vocal critic of bringing outsiders onto boards. Before the accounting scandal, Toshiba was widely known in Japan as the pioneer of good corporate governance. Its board had four external directors, and the audit committee included some of these external directors, a rarity in Japan. As illustrated by subsequent events and the ensuing investigation, such measures were woefully inadequate. Subsequently, Toshiba increased the number of outside directors to seven, forming a majority of its eleven member board. While appointing outside directors to the board is often considered a key to good corporate governance, it is not a panacea. These external directors have to be qualified and empowered to provide effective oversight of senior management and the firm’s financial reporting system.

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