April 20, 2024
Authors of this column are Mr. Amar Gill, Secretary-General, ACGA and Mr. Jamie Allen, Former Secretary-General, ACGA.
The Asian Corporate Governance Association (ACGA) is an independent, non-profit membership organisation dedicated to advancing corporate governance (CG) in the region. Every two years we provide a ranking of the CG eco-system of Asia Pacific markets. In the recent rankings, released in December 2023, Japan's market ranking jumped from equal fifth to second, just behind Australia, in the rankings of 12 major markets in the region.
The market ratings are based on seven inter-dependent categories integral to the CG eco-system of the markets. These categories relate to:
The Japan market score rose largely resulting from policymakers firing up CG reform, with the stock exchange on a campaign to boost shareholder value and Japan Inc under pressure to improve investor returns. The categories in in the 2023 rankings that saw the largest improvement for Japan were CG rules, Auditors and audit regulations, Investors and Listed companies.
For the Listed companies category, we surveyed 15 large cap companies in some depth for their governance practices and disclosure. The companies represent a range of sectors from autos, banking, chemicals, railways, pharmaceuticals, retail, telecoms, technology, consumer goods, electronics and industrial automation.
While the score that we gave for the Listed companies rose from 44 to 49, on this specific category Japan ranks only eighth of the 12 markets we cover, significantly lower than its second ranking in the overall CG eco-system ratings. Japan does relatively better on other categories; we find CG-related practices of the listed companies, however, to be somewhat lagging when compared with other large caps in the region.
Japan rates highest relative to the region in not following other markets on stock options for independent directors. Japanese listed companies typically pay independent directors a fixed monthly fee. A few offer restricted stock, usually on terms that are tightly structured and transparent. We note an improvement in the explanations provided for executive remuneration policies, with clearer short- and long-term targets, and greater use of stock incentives for executive directors.
Companies also tend to have easily accessible and thorough investor relations pages on their websites although many do not provide the names and contact details of their IR team.
Japanese companies rate well in their approach to sustainability reporting. There is solid GRI-style reporting across most large companies and some use of the SASB sectoral indicators as well as partial TCFD reporting. The value of materiality assessments varies, however; few companies make any attempt to link these to their operations or business strategies.
We find a high proportion of independent chairs on statutory or voluntary nomination committees and the majority of directors on these committees were usually independent. The nomination committees meet quite frequently: in some cases four to five times a year while for some companies 10 times or more. This reflects a more serious approach than in many companies with controlling shareholders in the region, where the nomination committee gets together for a cursory discussion possibly once or twice a year under the watchful eye of the company chairman or his proxy.
While there has been improvement in recent years, however on board evaluation Japanese companies rate fairly similar to the region. Companies are taking a more sophisticated approach such as using external consultants and disclosing how they go about such evaluations. However, there is often a lack of narrative on the results of the process and recommended next steps.
Unfortunately, we did not find any real progress on the disclosure of director remuneration. Companies are only required to disclose compensation of executives earning ¥100m or more. For some companies this means it may just be one or two directors whose compensation is disclosed.
Scores for Japan were average on the quality and independence of audit committees. There has been improvement in this space since the introduction of the third system of governance, the "audit and supervisory committee company", almost 10 years ago. However, there remains a gap in the quality of disclosure between the three systems. Particularly for companies with a traditional Kansayaku board, it is often difficult to see who chairs the board or even if there is a chair. Most members of these committees have no apparent accounting or financial management expertise, going by the disclosures provided.
We also find little change in the extent to which companies talk about internal audit (IA). Depending on the board structure, IA will report to either the relevant committee and/or the CEO, sometimes also to the board of directors or senior management. In none of the companies surveyed did we find any explanation on how this reporting relationship works, how conflicts of interest are addressed, or if independent directors have any access to IA.
Japanese companies lag significantly on independent leadership on the board. Very few have an independent chair; of the 15 companies we examined, none had a lead independent director. Similarly, none had a female chair of the nomination committee, although most had one or two women on the committee.
We find very mixed levels of disclosure on policies and targets on board diversity. While some issuers provide firm targets on gender diversity, most companies do not provide any credible disclosure in this area.
Despite improvements, most disclosure non-financial reporting is very generic. There is more substantive reporting on cross-shareholdings in the Yuho as well as some CG reports, but often this only serves to highlight what is not being divulged, for example a detailed rationale for continuing to lock up large part of capital in the shares of other companies.
The skills matrix has become a requirement since the CG Code was last amended in 2021. Most of these reports, however, provide just a list of skills and ticks across a table of directors. The skills, however, are rarely defined, nor thoughtful discussions provided as to what this means for board composition now and in the future. We also noted limited disclosure on induction and ongoing training provided to directors. There appears to be a cultural reluctance in much of business to "train" newly appointed independent directors, given that they have supposedly been selected on the basis of extensive experience and knowledge.
New English-language disclosure rules from the TSE, which came just after we did our 2023 rankings, should contribute to greater transparency going forward. Increasing representation of women on nomination committees also tends to result in greater diversity on the boards, especially if there is a woman as chair of nomination committees. The CG eco-system has certainly improved in Japan, as indicated by ACGA's overall market rankings; over time we expect corporate practices to continue being pulled in a positive direction to meet the rising tide of shareholder expectations.