Japan Association of Corporate Directors

Looking back on my second year as Chairman of JACD, the number of JACD members has increased steadily, and the number of committees, seminars, and other activities have greatly increased both in terms of meetings and participants.

We believe that this reflects a growing awareness at both the company and individual levels of the importance of learning and thinking about corporate governance as a trend in the society in general. Regarding the enhancement of training programs, a priority subject, a new, substantially revamped program was launched in June 2023, and has received high satisfaction and evaluation from the participants.

In terms of broadening the scope of our activities, we have also compiled proposals for global standardization of governance structures, investment contracts and other structures, and incentive schemes such as SO, which are important for globally focused startups, and have promoted them through submissions to government ministries and agencies and by holding public seminars. As a result, we were able to provoke considerable discussion.

We also issued an "Urgent Statement on the Problem of Sexual Assault of Minors and Corporate Compliance Stance," and in October we prepared and published a standard governance code in relation to the issue, recognizing that we were also able to raise the issue again among many corporate executives.

As for the theme of our activities in the third year, corporate governance has become a common concept, and while there are still arguments over how to implement it, we hardly hear any arguments about the unnecessity of strengthening corporate governance anymore. We believe that efforts to improve corporate governance at each company have led to an increase in the confidence and reputation of the entire Japanese market, triggering an infusion of funds from foreign institutional investors and a robust rise in stock prices, and that a favorable positive spiral is being formed.

Therefore, we will continue to actively engage in committee activities, seminars, and other activities, and plan to further strengthen our focus on three issues.

First, JACD believes improving the quality of outside directors and the executive management team, who are the "drivers" of corporate governance, and improving the quality of engagement by institutional investors are key to substantiating corporate governance.

JACD intends to further strengthen its activities to encourage this in FY2024.

In terms of strengthening the abilities of internal and external directors and board secretariats involved in governance, we will continue to implement our newly launched three-tiered training program, with the aim of making it a standard role model program. We hope that in near future, board members of all listed companies will regularly participate in the same level of training.

Also, in the regular committee meetings, we will review the issues to be addressed by the Independent Directors Committee and provide more opportunities for learning, especially focusing on roles and requirements for independent directors, which will increase more and more in the future.

Regarding engagement, in light of the TSE's request for listed companies to increase their P/B ratios as of the end of March 2023, it is important to encourage companies to make precise management efforts to improve its earning power and growth over the long term, not just short-sighted and transient financial manipulation through dividend increases, share buybacks, and the sale of idle assets. We intend to consider the enhancement of engagement in the essential manner as one of our key activity tasks for this year. As indexes and other passive investment management have become the major trend in investment, the risk of hollowing out the engagement professionals who are committed to the true purpose of governance, long-term sustainable growth of corporate earnings, is rather growing. A great sense of urgency should be felt here. We would like to encourage institutional investors to join JACD and work together to find a solution.

Second, JACD intends to make a full-fledged effort to revise the Institutional design　of the Japanese companies. Japan's Companies Act allows for three types of institutional design, which is extremely rare compared to other countries, where the maximum number is two, and no one involved would ever consider the status quo to be good. If there is no review of the current situation, we need to say that the system is becoming fatigued after more than 20 years since the 2003 amendment to the Commercial Code of Japan.

In light of the current situation where it is not unusual for independent outside directors to constitute a majority of the board of directors, the current company with a nominating committee system has a major problem in that the powers of the nominating committee are designed to exceed those of the board of directors, which is essentially the most important body in terms of governance, regardless of the ratio of independent outside directors.

The resulting lack of usability has led to slow growth in the number of companies adopting the system and an increase in the number of companies staying with the audit committee system, which was originally intended as an intermediate and transitional institutional design for transitioning to a company with a nominating committee system.

JACD will propose the issues with the current system and suggestions for improvement, and then call for a general discussion on the ideal design of the organization and will strengthen its efforts to encourage all parties concerned with a view to revising the Companies Act in the near future.

In addition, we will again raise issues regarding the nature of audits by audit committees and the roles and qualifications of board audit committee members. We recognize that this is an area of concern that the JACD should address, since audit committee members are directors by nature.

We will also aim to clarify the audit system and prepare a manual on the duties of audit committee members in order for the audit committee system to work effectively.

Finally, most of the Japanese companies are privately held companies, small and medium-sized enterprises, and they generate more than 70% of GDP and employment. Corporate governance issues are important for these companies to sustainably increase productivity, profitability, and wages.

A committee will be formed to study and discuss the governance of private companies, which have different characteristics and issues from those of listed companies, such as relationships with founding owner families and business succession. Among our members, there are many privately held companies and their related parties that do not plan to go public, and JACD will complete and publish a recommendation that will meet the expectations of such parties by the end of FY2025.

In terms of the JACD organization structure, we welcomed Mr. Toru Takakura, President and CEO of Sumitomo Mitsui Trust Holdings, Inc. as a new board member, as well as many new executives, at the general membership meeting in May 2024, and succeeded in building an even stronger lineup.

This year, we would like to continue to energize the activities of the association through discussions with our members who are in charge of governance from various perspectives.