Corporate Governance in the United States and in Japan
By Atty. Vicente Roy L. Kayaban, Jr.
I. CORPORATE GOVERNANCE IN THE UNITED STATES
The corporate management structure, as required by state incorporation statutes, is pyramidal. At the base of the pyramid are the stockholders, who are the residual owners of the corporation. Basic to their role in controlling the corporation is the right to elect representatives to manage the ordinary business matters of the corporation and the right to approve all extraordinary matters.
The board of directors, as the shareholders’ elected representatives, are delegated the power to manage the business of the corporation. Directors exercise dominion and control over the corporation, hold positions of trust and confidence, and determine questions of operating policy. Because they are not expected to devote full time to the corporation’s affairs, directors have broad authority to delegate power to agents and to officers, who hold their offices at the will of the board. These officers, in turn hire and fire all necessary operating personnel and run the day-to-day affairs of the corporation.
The statutory model of corporate management, although required by most states, accurately describes the actual governance of only a few corporations. The great majority of corporations are closely held: they have a small number of stockholders and no ready market for their shares, and most of the shareholders actively participate in the management of the business. Typically, the shareholders of a closely held corporation are also its directors and officers.
Although the statutory model and the actual governance of closely held corporations diverge, in most states closely held corporations must adhere to the general corporate statutory model. One of the greatest burdens conventional general business corporation statutes impose on closely held corporations is a set of rigid corporate formalities. Although these formalities may be necessary and desirable in publicly held corporations having separate management and ownership, in a closely held corporation, where the owners are usually the managers, many of these formalities are unnecessary and meaningless. Consequently, shareholders in closely held corporations tend to disregard the formalities, sometimes forfeiting their limited liability as a result. In response to this problem, the 1969 amendments to the MBCA, which were carried over to the Revised Act, included several liberalizing provisions for closely held corporations. Moreover, some states have enacted special legislation to accommodate the needs of closely held corporations and a Statutory close Corporation Supplement to the Model and Revised Acts has been promulgated.
The Supplement has relaxed most of the nonessential corporate formalities. It permits operation without a board of directors, authorizes broad use of shareholder agreements (including their use in place of bylaws), makes annual meetings optional, and authorizes one person to execute documents in more than one capacity. Most importantly, it prevents courts from denying limited liability simply because the corporation is a statutory close corporation. The general incorporation statute applies to closely held corporations except to the extent that it is inconsistent with the Supplement.
In sharp contrast is the large, publicly held corporation with a vast market for its shares. These shares typically are widely dispersed, and very few are owned by management. Approximately one-half are held by institutional investors (such as insurance companies, pension funds, mutual funds, and trusts), which manage funds for individual investors; the remaining shares are owned directly by individual investors. Whereas the great majority of institutional investors exercise their right to vote their shares, most individual investors do not. Nonetheless, virtually all shareholders who vote for the directors do so through the use of proxy – an authorization by a shareholder to an agent (usually the chief executive officer of the corporation) to vote his shares. The majority of shareholders who return their proxies vote as management advises. As a result, incumbent management prevails in nearly all elections and actually determines its own membership.
Thus, the 500 to 1,000 large, publicly held corporations – which own the great bulk of the industrial wealth of the United States – are controlled by a small group of corporate officers. This great concentration of the control over wealth, and the power that results from it, raises social, policy, and ethical issues concerning the governance of these corporations and the accountability of their management. The actions (or inactions) of these powerful corporations greatly affect the national economy, employment policies, the health and safety of the workplace and the environment, the quality of products, and the effects of overseas operations. Accordingly, the accountability of management is a critical issue.
Nevertheless, the structure and governance of corporations must adhere to incorporation statute requirements.
ROLE OF SHAREHOLDERS
The role of the shareholders in managing the corporation is generally restricted to the election of directors, the approval of certain extraordinary matters, the approval of corporate transactions that are void and voidable unless ratified, and the right to bring suits to enforce these rights.
The right to vote for a director also includes the right to remove, by a majority vote of the stockholders, with or without cause, in a meeting called for that purpose.
To protect a shareholder’s interest in the corporation, the law provides shareholders with certain enforcement rights. These include the right to obtain information, the right to sue the corporation directly or to sue on the corporation’s behalf, and the right to dissent.
The ultimate recourse of a shareholder, short of selling his shares, is to bring suit against or on behalf of the corporation. Shareholder suits are essentially of two kinds: direct suits – wherein a shareholder sues to enforce a claim that he/she has against the corporation, based on his/her ownership of shares, and for which any recovery goes to the shareholder plaintiff; and derivative suits which may be brought by one or more shareholders on behalf of the corporation to enforce a right belonging to it, when the board of directors refuses to so act on the corporation’s behalf. In the latter, recovery usually goes to the corporation’s treasury, so that all shareholders can benefit proportionately.
ROLE OF DIRECTORS AND OFFICERS
Management of a corporation is vested by statute in its board of directors, which determines general corporate policy and appoints officers to execute that policy and to administer the day-to-day operations of the corporation. Both the directors and officers of the corporation owe certain duties to the corporate entity as well as to the corporation’s shareholders and are liable for breaching these duties.
FUNCTION OF THE BOARD OF DIRECTORS
Although the shareholders elect them to manage the corporation, the directors are neither trustees nor agents of the shareholders or the corporation. They are, however, fiduciaries who must perform their duties in good faith, in the best interests of the corporation, and with due care.
The Revised Act states that “all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of, its board of directors, subject to any limitation set forth in the articles of incorporation. In some corporations, the board members are all actively involved in the management of the business. In these cases, the corporate powers are exercised by the board of directors. On the other hand, in publicly held corporations, a majority of board members often are not actively involved in management. Here, the corporate powers are exercised under the authority of the board, which formulates major management policy but does not involve itself in day-to-day management.
In public held corporations, the directors who are also officers or employees of the corporation are INSIDE DIRECTORS, while the directors who are not employees are OUTSIDE DIRECTORS. Outside directors who have no business contacts with the corporation are UNAFFILIATED DIRECTORS; outside directors having business contacts –such as investment bankers, lawyers, or suppliers – are AFFILIATED DIRECTORS. Under the Revised Act, a corporation having fifty or fewer shareholders may dispense with or limit the authority of a board of directors by designating in its articles of incorporation those who will perform some or all of the duties of a board.
The board determines corporate policy in a number of areas, including (1) selecting and removing officers, (2) determining the corporation’s capital structure, (3) initiating fundamental changes, (4) declaring dividends, and (5) setting management compensation.
EXERCISE OF DIRECTORS’ FUNCTIONS
Though they are powerless to bind the corporation when acting individually, directors do have this power when acting as a board. The board may act only through a meeting of the directors or through written consent signed by all of the directors, if such consent without a director’s meeting is authorized by the incorporation statute and is not contrary to the charter or bylaws.
OFFICERS
The board of directors appoints the officers of a corporation to hold the offices provided for in the bylaws, which set forth the respective duties of each officer. Statutes generally require as a minimum that the officers consist of a president; one or more vice presidents, as prescribed by the bylaws; a secretary; and a treasurer. With the exception that the same person may not hold the office of president and secretary at the same time, a person may hold more than one office.
The Revised Act permits every corporation to designate whatever officers it wants. Although the act specifies no particular number of officers, one of them must be delegated responsibility to prepare the minutes of directors’ and shareholders’ meetings and to authenticate corporate records. The Revised Act permits the same individual to hold all of the offices of a corporation.
Most state statutes provide that officers be appointed by the board of directors and that they serve at the pleasure of the board. Accordingly, the board may remove officers with or without cause. Of course, if the officer has an employment contract that is valid for a specified time period, removing the officer without cause before the contract expires would constitute a breach of the employment contract. The board also determines the compensation of officers.
The officers are, like the directors, fiduciaries to the corporation. On the other hand, unlike the directors, they are agents of the corporation. The roles of officers are set forth in the corporate bylaws.
The Revised Act provides that each officer has the authority provided in the bylaws or prescribed by the board of directors, to the extent that such prescribed authority is consistent with the bylaws. Like that of other agents, the authority of an officer to bind the corporation may be (1) actual express, (2) actual implied, or (3) apparent.
DUTIES OF DIRECTORS AND OFFICERS
Generally, directors and officers owe the duties of obedience, diligence, and loyalty to the corporation. These duties are for the most part judicially imposed. By imposing liability upon directors and officers for specific acts, state and federal statutes supplement the common law, which nonetheless remains the most significant source of duties.
A corporation may not recover damages from its directors and officers for losses resulting from their poor business judgments or honest mistakes of judgment. Directors and officers are not duty-bound to ensure business success. They are required only to be obedient, reasonably diligent, and completely loyal.
DUTY OF OBEDIENCE
Directors and officers must act within their respective authority. For any loss the corporation suffers because of their unauthorized acts, they are held absolutely liable in some jurisdictions; in others, they are held liable only if they exceeded their authority intentionally or negligently.
DUTY OF DILIGENCE
In discharging their duties, directors and officers must exercise ordinary care and prudence. Some states interpret this standard to mean that directors and officers must exercise “the same degree of care and prudence that [those] promoted by self-interest generally exercise in their own affairs.” Most states, as well as the Revised Act, hold that the test requires a director or officer to discharge corporate duties (1) in good faith; (2) with the care an ordinary prudent person in a like position would exercise under similar circumstances; and (3) in a manner the director or officer reasonably believes to be in the best interests of the corporation. A director or officer whose performance of her duties complies with these requirements is not liable for any action she takes as a director or officer or for any failure to act.
So long as the directors and officers act in good faith and with due care, the courts will not substitute their judgment for that of the board or officer – the so-called business judgment rule. Directors and officers will nevertheless be held liable for bad faith or negligent conduct. Moreover, they may be liable for failing to act. In one instance, a bank director, who in the five-and-one half years that he had been on the board had never attended a board meeting or examined the institution’s books and records, was held liable for losses resulting from the unsupervised acts of the president and cashier, who had made various improper loans and had permitted large overdrafts.
RELIANCE ON OTHERS
Directors and officers are permitted to entrust important work to others, and if they have selected employees with care, they are not personally liable for the negligent acts or willful wrongs of those selected. However, a reasonable amount of supervision is required; and an officer or director who knew or should have known or suspected that an employee was incurring losses through carelessness, theft, or embezzlement will be held liable for such losses.
Directors also may rely on information provided them by officers or employees of the corporation, committees of the board of directors, or legal counsel or public accountants. An officer is also entitled to rely upon this information, but this right may, in many circumstances, be more limited than a director’s because of the officer’s greater familiarity with the affairs of the corporation.
BUSINESS JUDGMENT RULE
Directors and officers are continuously called on to make decisions that require balancing benefits and risks to the corporation. Although hindsight may reveal that some of these decisions were not the best, the BUSINESS JUDGMENT RULE precludes imposing liability on the directors or officers for honest mistakes of judgment. To later benefit from the business judgment rule, a director or officer must make an informed decision without any conflict of interests, have a rational basis for making it, and reasonably believe it is in the corporation’s best interests. Moreover, where this standard of conduct has not been met, the director’s action (or inaction) must be shown to be the proximate cause of damage to the corporation.
Hasty or ill-advised action also can render directors liable. In a recent case, the Supreme Court of Delaware held directors liable for approving the terms of a cash-out merger. The court found that the directors did not adequately inform themselves of the company’s intrinsic value and were grossly negligent in approving the terms of the merger upon two hours’ consideration and without prior notice.
DUTY OF LOYALTY
The officers and directors of a corporation own a duty of loyalty (a fiduciary duty) to the corporation and to its shareholders. The essence of a fiduciary duty is the subordination of self-interest to the interest of the person or persons to whom the duty is owing. It requires officers and directors to be constantly loyal to the corporation, which they both serve and control.
An officer or director is required to disclose fully to the corporation any financial interest he may have in any contract or transaction to which the corporation is a party. (This is corollary to the rule that forbids fiduciaries from making secret profits.) His business conduct must be insulated from self-interest, and he may not advance his personal interest at the corporation’s expense. Moreover, an officer or director may not represent conflicting interests; his/her duty is one of strict allegiance to the corporation.
The remedy for breach of fiduciary duty is a suit in equity by the corporation, or more often a derivative suit instituted by a shareholder, to require the fiduciary to pay to the corporation the profits he/she obtained through the breach. It need not be shown that the corporation could otherwise have made the profits that the fiduciary realized. The object of the rule is to discourage breaches of duty by taking from the fiduciary all of the profits he/she has made. Though the enforcement of the rule may result in a windfall to the corporation, this is incidental to the rule’s deterrent objective. Whenever a director or officer breaches his/her fiduciary duty, he/she forfeits his/her right to compensation during the period he engaged in the breach.
CONFLICT OF INTERESTS
A contract or other transaction between an officer or a director and the corporation inherently involves a conflict of interest. Contracts between officers and the corporation are covered under the law of agency. Early on, the common law viewed all director-corporation transactions as automatically void or voidable but eventually recognized that this rule was unreasonable because it prevented directors from entering into contracts beneficial to the corporation. Now therefore, if such a contract is honest and fair, the courts will uphold it. In the case of contracts between corporations having an interlocking directorate (corporations whose boards of directors share one or more members), the courts subject the contracts to scrutiny and will set them aside unless the transaction is shown to have been entirely fair and entered in good faith.
The Revised Act and most states address these related problems by providing that such transactions are neither void nor voidable if, after full disclosure, they are approved by either the board of disinterested directors or the shareholders or if they are fair and reasonable to the corporation.
CORPORATE OPPORTUNITY
Directors and officers may not usurp any corporate opportunity that in all fairness should belong to the corporation. A corporate opportunity is one in which the corporation has a right, property interest, or expectancy; whether such an opportunity must be promptly offered to the corporation, which, in turn, should promptly accept or reject it. Rejection may be based on one or more of several factors, such as the corporation’s lack of interest in the opportunity, its financial inability to acquire the opportunity, legal restrictions on its ability to accept the opportunity, or a third party’s unwillingness to deal with the corporation.
DUTY NOT TO COMPETE
As fiduciaries, directors and officers owe to the corporation the duty of undivided loyalty, which means that they may not compete with the corporation. A director or officer who breaches his fiduciary duty by competing with the corporation is liable for damages caused to the corporation. Although directors and officers may engage in their own business interests, courts will closely scrutinize any interest that competes with the corporation’s business. Moreover, an officer or director may not use corporate personnel, facilities, or funds for her own benefit or disclose trade secrets of the corporation to others.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Directors and officers incur personal liability for breaching any of the duties they owe to the corporation and its shareholders. Under many modern incorporation statutes, a corporation may indemnify a director or officer for liability incurred if he acted in good faith and in a manner he reasonably believed to be in the best interests of the corporation, so long as he has not been judged negligent or liable for misconduct. The Revised Act provides for mandatory indemnification of directors and officers for reasonable expenses they incur in the wholly successful defense of any proceeding brought against them because they are or were directors or officers. These provisions, however, may be limited by the articles of incorporation. In addition, a corporation may purchase insurance to indemnify officers and directors for liability arising out of their corporate activities, including liabilities against which the corporation is not empowered to indemnify directly.
LIABILITY LIMITATION STATUTES
At least forty states have recently enacted legislation limiting the liability of directors. Most of these states, including Delaware, have authorized corporations – with shareholder approval – to limit or eliminate the liability of directors for some breaches of duty. A few states permit shareholders to limit the liability of officers. The Delaware state provides that the article of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of directorial duty, provided that such provision does not eliminate or limit the liability of a director (1) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (2) for acts or omissions lacking in good faith or involving intentional misconduct or a knowing violation of law, (3) for liability for unlawful dividend payments or redemptions, or (4) for any transaction from which the director derived an improper personal benefit.
A handful of states have directly eliminated personal liability for money damages, subject to certain exceptions. For example, under the Indiana statute, a director is liable only if he has breached or failed to perform her duties in compliance with the statutory standard of care and the breach or failure to perform constitutes willful misconduct or recklessness. A third approach, taken by some states, limits the amount of money damages that may be assessed against a director or officer.
The Revised Act authorizes the articles of incorporation to include a provision eliminating or limiting – with certain exceptions – the liability of a director to the corporation or its shareholders for any action he takes, or fails to take, as a director. The exceptions, for which his liability would not be affected, are (1) the amount of any financial benefit the director receives to which he is not entitled, such as a bribe, kickback, or profits from a usurped corporate opportunity; (2) an intentional infliction of harm on the corporation or the shareholders; (3) liability under Section 8.33 for unlawful contributions; and (4) an intentional violation of the criminal law.
II. CORPORATE GOVERNANCE IN JAPAN
After the Japanese economic bubble burst, the Japanese government and business leaders neglected to take the steps required towards real structural reform, opting instead for what they termed as the soft-landing. Following ten years of a continuous soft-landing, the momentum for reform finally began to gather pace in the late 1990s. It was against this background that the recent series of amendments were introduced to the Japanese Commercial Code in 2001 and 2002.
Motivations behind the reforms have been twofold. Having witnessed many examples of corporate malfeasance, especially in reckless financial transactions which have resulted in still-prevalent problems with bad debt, the regulators wanted a system with stricter internal control with the aim of providing a more transparent allocation of responsibility within the company and preventing wrongdoings and mismanagement. On the other hand, business managers wanted more flexibility with the restructuring of their business activities and what they could do with the companies in relation to the interests of shareholders and creditors. For instance, new rights of shareholders attaching to a class share have been introduced to the Code for the benefit of start-up companies that need to attract investments from various sources.
INTERNAL MANAGEMENT STRUCTURE
DIRECTORS
Under the Code, the board of directors is the sole body responsible for the management of the company’s affairs. A company requires a minimum of three directors with at least one of them being nominated to the position of representative director. A director is appointed by the shareholders at a shareholder’s meeting for a maximum of two years and incorporated entities may not be appointed to the board of directors.
The directors are usually appointed from among the employees. However, in answer to the public demand for Japanese companies to improve their internal management structure, the number of external directors has increased. The definition of “external director” under the Code as amended by the amendments made in December 2001, is a director who is not presently, nor has been, engaged in the administration of the business of the company or any of its subsidiaries whether as director, officer or other employee.
STATUTORY AUDITORS
Under the Code, a large company is required to have at least three statutory auditors. At least one of them is required not to have been a director or an employee of the company or any of its subsidiaries for five years prior to his/her appointment and is known as the external statutory auditor. The statutory auditors’ role is to oversee the operations of the board of directors and to audit, investigate and report on the board’s activities. Statutory auditors are appointed by resolution of a shareholders’ meeting for a period of 4 years, as a result of the December 2001 amendment. Statutory auditors’ tasks are to provide checks and balances to the board of directors in the best interests of the company. They should be distinguished from the accounting auditors who were professional accountants engaged by companies to audit their accounts.
Although the system of statutory auditors has been adopted by the Code in order to provide an internal control system, its effectiveness has been reduced as the statutory auditors’ functions have come to be viewed as a mere formality.
LIMITATION OF DIRECTORS’ LIABILITY
Following a flood of shareholders’ derivative actions against directors and statutory auditors and an enormous increase in the size of sums of money demanded by way of damages, the business sector has been lobbying for certain limitations to be set on the liabilities of directors.
As a result, the December 2001 amendment provides that directors and statutory auditors may be indemnified against their liability in derivative actions in the following instances:
(A) Indemnification is approved by a special resolution passed at the shareholder’s meeting;
(B) Indemnification is approved by a resolution of the board of directors if this is provided for under the articles of incorporation; or
(C) Indemnification is confirmed by a liability limitation agreement entered into between the company and an external director, but not the external auditors, if this is provided for under the articles of incorporation.
It is not possible to indemnify directors against liabilities arising from non-compliance with legislation or the company’s articles of incorporation unless it can be shown that the director acted in good faith and without gross negligence. There are certain statutory liabilities against which indemnities may never be given. Such liabilities include making illegal distributions, conflicts of interest and offering benefits only to a specified group of shareholders.
REFORM UNDER THE COMMERCIAL CODE
Amendments have been made to the Code in 2001 and 2002 in the area of corporate governance and, as a result, they provide the large companies and deemed large companies with options in relation to their internal management structure. The amendments made in May 2002 introduced the concept of “deemed large company”. A company is a deemed large company under the Code if it has issued share capital of more than JPY100 million and it states in its Articles of Incorporation that the company shall be audited by the auditor who is either a professional accountant or an accounting firm. The December 2001 amendment increased the power of statutory auditors. The may 2002 amendment provides an alternative system which replaces the statutory auditors with three committees and executive officers.
EMPOWERING THE STATUTORY AUDITORS
TERMS OF OFFICE
The December 2001 amendment increased the term of statutory auditors from three years to four years. This provision, three year, is to come into effect upon the first shareholders’ meeting to be held in respect of the fiscal years. This ending later than May 1, 2002.
DUTY TO ATTEND BOARD MEETINGS AND STATE OPINIONS
December 2001 amendment imposes a duty on statutory auditors to be present at the board meetings and to state their opinions whenever necessary. The Commercial Code prior to the amendment started that statutory auditors had the right, as opposed to a duty, to attend board meetings and to state their opinions.
RIGHT TO STATE OPINIONS AT TIME OF RESIGNATION
A resigning statutory auditor is entitled under the December 2001 amendment to attend the first shareholders’ meeting following his/her resignation and to state the reasons for his/her resignation. In reality, there are many cases where statutory auditors resign pursuant to agreements reached with directors, or statutory auditors are forced by directors to resign midway through their term of office. In such cases, this newly conferred right effectively gives statutory auditors the right to state his case in front of the shareholders.
EXTERNAL STATUTORY AUDITORS
Prior to the December 2001 amendment, large companies were required to have at least one external statutory auditor. Following the December 2001 amendment, at least one half of the statutory auditors must be external statutory auditors.
In addition, the definition of external statutory auditors has been tightened by the December 2001 amendment. Formerly, a person could be appointed as an external statutory auditor even if he had previously been a director, officer or other employee of the company or its subsidiaries provided that five years had elapsed between his previous employment by the company and the appointment as an external statutory auditor. Following the December 2001 amendment, such person may not become an external statutory auditor, regardless of the time that has elapsed since the last day of his employment with the company.
However, these provisions relating to the external auditors do not come into effect until the fist shareholders’ meeting to be held in respect of the fiscal year ending later than on May 1, 2005.
RIGHT TO CONSENT TO AND PROPOSE THE APPOINTMENT OF STATUTORY AUDITORS
Following the December 2001 amendment, the directors of large companies must obtain the approval of the board of statutory auditors before submitting a proposal to the shareholders’ meeting for the appointment of a new statutory auditor.
In addition, the board of statutory auditors is now entitled the request the board of directors to appoint a statutory auditor at the shareholders’ meeting. The board of statutory auditors may also, of its own accord, submit a proposal for the appointment of a statutory auditor to the shareholders’ meeting.
NEW STRUCTURE INVOLVING COMPANY COMMITTEES
Following the May 2002 amendment, which comes into force on April 1, 2003, a large or deemed-large company is able to choose to adopt an alternative system of management. In this new system the company may dispense with the statutory auditors and, in its place, establish three committees, each of which consist of three or more directors and in which the external directors form the majority. The board of directors is to delegate a part of its authority to the three committees and is entitled to decide the distribution of profit instead of the shareholders’ meeting. It is intended that this new structure will enhance the supervisory authority and integrity of the board of directors. The term of the directors is reduced to one year if the company adopts the new committee structure.
THREE COMMITTEES
The three committees are as follows:
(A) Appointment Committee, which determines a proposal for the general meeting of shareholders regarding the appointment and the dismissal of directors.
(B) Audit Committee, which audits the administration of the company by its directors and executive officers; and
(C) Remuneration Committee, which determines the remuneration of the company’s directors and executive officers.
THE EXECUTIVE OFFICER
Under the new structure, the board of directors is to appoint the executive officers and representative executive officers who shall carry on the day-to-day administration of the company. The aim of the new structure us to allow for the separation of the administration and the supervision of the company. While the executive officers are granted extensive authority to deal with business matters, the board of directors is to function as the supervisory body, keeping a check on both the fellow directors and the executive officers. The term of the executive officers is one year. Derivative actions may be filed against the executive officers.
IMPORTANT ASSET COMMITTEE
Under the Important Asset Committee would be composed of three or more directors and would determine matters to the acquisition and disposal of substantial company property and the borrowing of substantial amounts of money. All these matters required board approval prior to the May 2002 amendment. This new provision is intended to facilitate a speedier decision-making structure for such companies that would otherwise have difficulties in holding a board meeting.
CONCLUSION
As can be seen from the above, the recent changes to the law relating to corporate governance give the companies the choice as to which structure to employ. It remains to be seen how many companies will adopt the new committee system, which model performs better in terms of internal control as well as productivity, and how the market reacts to governance issues in the future.
According to a survey conducted by the Ministry of Justice in May 2002, there are 11,000 companies that have an issued share capital of more than JPY500 million ($4.2 million). The number of companies listed on all recognized exchanges in Japan is no more than 2,700. It is clear that the scope for the potential application of the new committee structure is wider than listed companies. The Code, however, imposes no duty on large and/or deemed-large companies to change their existing management structure, nor to explain why they are not setting up the committees. The decision is entirely left to the individual companies. It will be left to the opinion of investors and markets which to influence the decisions taken by those large companies.
Source: Corporate governance in Japan: Recent reform and the story so far
Yoshihiko Fuchibe, Yutaka Yazawa, Hiroyuki Komyo. International Financial Law Review: The IFLR Guide to Corporate Governance 2002 London:2002. p. 45-50
posted by Legal Management Journal @ 11:37 AM
