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Japan to face dearth of outside directors in 2021: survey

  • December 16, 2020
  • , Nikkei Asia , 7:35 p.m.
  • English Press

TOKYO — Japanese companies will face a shortfall of about 1,000 outside directors next year, when the Financial Services Agency and the Tokyo Stock Exchange revise the country’s corporate governance code, according to a Nikkei survey.


Nikkei subsidiary QUICK found that corporate governance reports submitted by 2,178 companies listed on the Tokyo Stock Exchange show that more than 40% have boards with fewer than one-third independent outside directors, the likely required minimum under the new rules. Even large companies such as Shin-Etsu Chemical and Keyence have boards composed of fewer than one-third outside directors.


The revised guidelines are expected to require companies on the tentatively named Prime Market that will replace the first section of the TSE to have boards with more than one-third outside directors. The standards will be stricter than current guidelines, which stipulate that boards must have two or more outsiders. The new regulations are not legally binding, but companies that do not comply will have to explain why.


To meet the new criteria without cutting the number of directors, it will be necessary to appoint 915 additional independent outside directors.


As of August, there were 6,285 independent outside directors at TSE-listed companies. To meet the new requirements, the number of outsiders will need to rise by nearly 20% by April 2022, when the Prime Market is established.


Because there are relatively few people qualified to serve as outside independent directors, many serve on multiple corporate boards, and the number is rising.


According to ProNed, a corporate governance adviser, the number of outside officers, including corporate auditors who serve as outside directors for two or more companies on the first section of the TSE has risen 20% over the last three years to 1,284. There are 45 outside directors who hold such positions with more than four different companies.


Takeshi Natsuno, the developer of the i-mode internet service, sits on the board of five companies, including publishing house Kadokawa and Oracle Japan, a unit of the U.S.-based software company. Christina L. Ahmadjian an American university professor who lives in Japan, serves with four companies. Atsuko Furuta of IR Japan, who introduces outside officers to companies, points out that “women, foreigners who speak Japanese and people with strong IT backgrounds are in short supply.”


If the number of concurrent posts increases, those board members will have less time to focus on each assignment and the boards may become less effective, with more frequent absences among directors. The U.K bars people from serving on more than one board at large companies. Germany prohibits holding more than three concurrent board posts.


In addition to a shortage of outside director candidates, Japanese companies are having trouble meeting demands for greater diversity. Experts say a system to develop qualified board members is urgently needed.

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