SLI: Japanese boards still lack independence

Added 19th June 2017

A global group of institutional investors counts successes and disappointments after three years of a collaborative effort to push for more board independence in Japanese corporations.

SLI: Japanese boards still lack independence




In 2014, a group led by BMO Global Asset Management, Legal & General Investment Management and Standard Life Investments as well as pension funds and asset managers from North America and the UK, pushed for more board independence among Japanese companies in which they invest.

The group's goal was one-third board member independence among a selection of 33 Japanese corporations.

Of the 33 companies, only six have reached the goal of one-third board independence

In addition to engaging directly with these companies, the group members exercised their voting rights as shareholders to effect appointments of independent directors.

Of the 33 companies, only six have reached the goal of one-third board independence by June 2017, the group announced in a report. They are Mitsubishi Electric, Mitsubishi Estate, Mitsui Fudosan, Nintendo, Sumitomo Mitsui Financial Group and Takeda Pharmaceutical.

On the flip side, the report notes that ten companies in the target group still had lower than 10% independence ratio and their progress had been minimal.

Japan's governance woes

Despite the overall size and strength of the Japanese capital market, governance practices have been its long-standing weakness. Traditionally, a typical board of directors of a Japanese company consists only of its senior executives.

Recognising the limitations of such practices, in 2015 the Tokyo Stock Exchange adopted the Corporate Governance Code, which included a recommendation for companies to include at least two independent directors on their boards.

Japan’s prime minister Shinzo Abe included corporate governance reform as part of the structural reforms “third arrow” of his Abenomics platform.

The collaborative group of institutional investors is guided by the belief that robust corporate governance enhances shareholder return.

“A truly independent director can bring fresh ideas as a result of external experience and challenge management constructively without the constraint of a vested interest in the business,” stated the group’s report.

“In other developed markets, boards are expected to have majority independence,” stated the report. “The call for one-third board independence is a reflection of the stage of corporate governance development in Japan.”

In a research report on corporate governance in Japan published in April 2017, the ESG research firm Sustainalytics noted that only 5% of Japanese companies it analysed had boards that were majority independent.

Data published by Tokyo Stock Exchange shows that in July 2016 97.1% of companies had at least one independent director and 79.7% had two or more. The progress is clearly visible as only one year earlier less than 50% had two or more independent directors. 

Among Sustainalytics’ four corporate governance indicators, board independence is the one on which Japanese companies’ aggregate score is the lowest. They are doing better on factors such as industry experience from outside companies, gender diversity and long-term incentives.

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