TOKYO -- Japan's listed companies are increasingly eager for people with senior management experience to sit on their boards as outside directors. With large shareholders such as asset managers pressing the companies they invest in to appoint directors with proven business acumen, the trend looks likely to continue.
Outside directors became much more common at listed companies after Japan adopted the Corporate Governance Code in 2015. But those appointees were mostly professionals, such as lawyers and academics.
Of the 50 highest-valued companies in Japan that end their business year in December and hold general shareholders meetings in March, 35 will have at least one outside director who has been a director or executive officer of a company, according to Takara Printing, which printed shareholder meeting notices for the companies.
The number of such outside directors is expected to rise by 10, or 18%, to 66 compared with the previous year. Those with senior management experience are thus expected to account for 40% of the 163 outside directors expected to be appointed by the 50 companies, up 5 percentage points from a year earlier.
Asahi Group Holdings, for example, will propose replacing Mariko Bando, chancellor of Showa Women's University, with Yasushi Shingai, a director at Japan Tobacco, when Bando's term expires. As head of JT's finance division, Shingai was responsible for the company's acquisitions, including the purchase of Gallaher Group of the U.K. in 2007. Asahi expects Shingai to advise the company on how to govern the foreign companies it has purchased, and how to raise its profit as the company seeks to expand overseas.
Ebara plans to appoint two new outside directors with management experience to replace Nobuko Matsubara, a former vice labor minister, and another director. The candidates are Hiroshi Oeda, special adviser with Nisshin Seifun Group, and Masahiro Hashimoto, former president and chief operating officer of Screen Holdings. The maker of industrial equipment hopes to apply the new directors' experience in finance and human resources to its own business.
In 2015, the Tokyo Stock Exchange and the Financial Services Agency introduced the Corporate Governance Code. The guidelines call on listed companies to have at least two independent outside directors on their boards.
Companies responded swiftly and the number of outside directors swelled. But most of these newly appointed directors lacked management experience because such talent is scarce. They were mostly people who already had ties to the companies, such as outside accountants and lawyers who were part of the companies' audit and supervisory boards. Most companies complied with the guidelines simply by shifting people around.
According to the TSE, lawyers, accountants, tax accountants and academics comprised 35.5% of all independent outside directors at listed companies as of the end of 2016, up 4.6 percentage points from 2014, the year before the code was introduced.
To improve corporate governance, it is not enough for companies to meet numerical targets for outside directors. They must take advantage of outside directors' expertise to deepen boardroom discussions. Calls are growing for companies to adopt a governance system that encourages risk-taking. And demand is growing for people who can give concrete advice to the board based on their management experience.
Investors are wary of Japanese companies that have mostly lawyers and academics as outside directors. "Many companies choose outside directors for obscure reasons," said Kazuhiro Toyoda, a fund manager at Schroders, a British asset manager. An analyst at Asset Management One said the company is encouraging those whose outside directors are mostly lawyers and accountants to welcome people with management experience.
An FSA group working on a revised version of the Corporate Governance Code has called for diversity in corporate boards. Yuko Yasuda of Russell Reynolds Associates, a recruiting agency, said the company is receiving more inquiries from clients who want former company presidents and chief financial officers as outside directors. The hunt for people with management experience is expected to heat up ahead of shareholders meeting season in June.