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Japan's new business code to call for more outside directors

More accountability key to preventing scandals and luring foreign investors

TOKYO -- The Japanese government will urge companies to adopt a more transparent decision-making process through measures such as allocating at least one-third of board seats to outsiders.

The Financial Services Agency will include the guideline in this year's corporate governance code, replacing the old standard calling for just two or more outside directors. Companies are not obligated to follow the code, but they need to explain their reasons for noncompliance.

Japanese corporations trail foreign counterparts in appointing outside board members. Such directors make up 84% of boards at companies in the U.S., 69% in France and 61% in the U.K., said U.S. consultancy Spencer Stuart. In Japan, the figure totals just 31% even among the companies with the largest market caps.

In the U.S. and Europe, CEOs are often hired and fired by nomination committees composed mainly of outside directors. But that decision-making process in Japan remains opaque to outsiders because top executives typically appoint a successor. The Financial Services Agency sees murky selection of leaders as a contributing factor behind some business improprieties and wants to make the process more open.

The new governance code also will hold companies more accountable for their cross-shareholdings. The FSA will encourage businesses to unload such shareholdings, along with establishing a system to determine whether ownership of each equity is appropriate.

Making Japanese companies more attractive to foreign investors also drives the FSA's push for greater transparency in corporate governance.

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