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Economy

Japan crafts governance reforms, with 2020 set as target year

Listed and unlisted companies are both required to have outside directors

More than 90% of companies listed on the Tokyo Stock Exchange already have an outside director, but this will become a requirement.   © Reuters

TOKYO -- A government panel released a package of corporate governance reform proposals on Wednesday, setting out such rules as requiring larger corporations -- both listed and unlisted -- to have outside directors.  

The government plans to submit relevant legislative revisions to the ordinary Diet session slated to convene soon, with 2020 set as the target year for implementation.

Under the proposals, compiled by a subcommittee of the Justice Ministry's Legislative Council, companies must have outside directors if they meet certain conditions, including having at least 500 million yen ($4.6 million) in capital or at least 20 billion yen in total debts.

The current law requires businesses that meet those conditions but do not have outside directors to explain to shareholders why they had not done so.

More than 90% of companies listed on the Tokyo Stock Exchange already have an outside director, but 2.3% remain without, citing reasons like costs or a lack of fitting candidates.

Adding directors with no personal stake in the business who can bring an impartial, third-party perspective is intended to improve boards' diversity and transparency and help boost profitability and competitive power.

But with major scandals erupting even at companies with outside directors, like Nissan Motor and Toshiba, issues remain over how to make the positions more effective.

The presence of outside directors failed to prevent cases like Nissan's former Chairman Carlos Ghosn's arrest for allegedly understating his pay, as well as Toshiba's struggles with massive losses incurred from U.S. nuclear operations. Concerns also remain over making outside directors' oversight more effective by guaranteeing their independence.

A shortage of candidates may play into making the position less effective. A number of people hold outside directorships at multiple businesses simultaneously.

The proposals also require boards of directors to set and disclose basic thinking on executive compensation, a matter where transparency concerns have been building. Boards would need to report their standards for all types of pay, whether fixed or linked to performance.

The panel stopped short of requiring that individual executives' pay be disclosed.

The proposals also limit investors to making to a maximum of 10 proposals at shareholder meetings, a safeguard against certain parties dominating meetings with many proposals, in order to facilitate dialogue among companies and investors. No such cap previously existed. Proposals that insult individuals or impede the overall function of shareholder meetings would be disallowed.

In addition, the revisions allow for shareholder meeting materials to be provided digitally. At present, they are as a rule printed on paper and require individual approval from shareholders to be made available online. Companies would be able to publish the documents digitally without seeking approval if they write in their articles of incorporation that they will do so.

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