Independent Directors and the Japanese Experience (Part 2)

As noted, listed companies on the Tokyo Stock Exchange must have one independent director.  They have until 2011 to conform to the requirement.  Progress, even for this modest requirement, has been slow.  As GovernanceMetrics reports:

• According to data from the TSE, almost one in ten of the 2,094 companies that reported as of March 31, 2010 had no independent directors. Companies with no independent directors include Toyota Tsusho Corp., Daihatsu Motor Co., and Hisamitsu Pharmaceutical Co.  Staggeringly, 43.5% of the 404 Japanese companies GMI covers do not have a single independent director on their board and these represent the largest listed companies in Japan.  Furthermore, less than 5% of the Japanese companies GMI covers have boards that are majority independent.  In contrast, 74.7% of the 3,644 developed markets companies GMI covers have majority independent boards.

A more detailed description of board membership can be found in The White Paper on Corporate Governance, published by the Tokyo Stock Exchange. 

Companies such as Toyota lack any directors who meet the requirements of the NYSE.  As the auto company reported in its most recent report filed on Form 20-F:

• Toyota currently does not have any directors who will be deemed as an “independent director” as required under the NYSE Corporate Governance Rules for U.S. listed companies. Unlike the NYSE Corporate Governance Rules, the Corporation Act does not require Japanese companies with a board of corporate auditors such as Toyota to have any independent directors on its board of directors. While the NYSE Corporate Governance Rules require that the non-management directors of each listed company meet at regularly scheduled executive sessions without management, Toyota currently has no non-management director on its board of directors. Unlike the NYSE Corporate Governance Rules, the Corporation Act does not require, and accordingly Toyota does not have, an internal corporate organ or committee comprised solely of independent directors.

As the TSE statistics suggest, the Toyota board structure is not unusual.  Insular boards are the practice.  Yet the current set of scandals surrounding Toyota indicate the need to revisit this board structure.

The slow acceptance of independent directors may have a cultural explanation.  After all, the purpose of independent directors is to provide a sometimes discordant voice in the board room, an approach inconsistent with a culture that places considerable weight on communal values and consensus.  The problem, of course, is that these values are not shared globally.  Large Japanese companies need a board that meets global rather than exclusively Japanese needs. 

Comments

[Dave McCombs]

Very interesting. Thanks for that post. Independent directors may be a hard sell in Japan, partly because, over the past three years, companies without them are outperforming. Any thoughts on why that is?