Corporate Governance Principles: A Japanese View (Final Report)
30 Pages Posted: 26 Mar 1999
Date Written: May 26, 1998
The Committee of the Corporate Governance Forum of Japan published its "Corporate Governance Principles--Interim Report on Oct. 30, 1997. This is the Final Report. The principles stated herein have been designed as a two-step formula for realizing effective corporate governance. Principles that should be adopted immediately (or as soon as possible following necessary legal reform) are "Step A Principles". Principles, which should be aimed for early in the 21st Century, are necessary (with amendments) to illuminate the path toward the globalized market, but require legal reform on a grand scale are designated "Step B Principles". Our "16 Standard Principles" are aimed at positioning entrepreneurs and the board of directors at the heart of the corporate governance debate, and will give us appropriate standards against which we can judge ourselves. We of the committee, intend to take the lead in implementing in our own companies what we are herein announcing. We intend to develop these principles into a "Code of Best Practice." Our aim is to establish an independent system of outside directors to promote the transferability of corporate executives between companies. Also we will endeavor to have these principles adopted as part of the requirements for Initial Public Offerings. The publicly-owned corporation, the basic constituent of corporate society throughout the world, is actually a system of cooperative relationships between various stakeholders, including shareholders, management, employees, consumers, clients, and creditors. But shareholders in particular, the providers of equity capital, are given a special position. As they constitute the final risk-takers of the company who are entitled to claim the residual profits of the company, they are often considered the owners of the company. In this sense and under the system of private ownership, shareholders are granted the right of governance over the company for the benefit of their own interests in the form of maximized returns on their investment. In publicly-owned corporations, the board of directors act as the representatives of shareholders and perform a corporate governance function. Shareholders, who may be widely dispersed, can elect directors, who in turn choose managers to manage the company effectively on behalf of the shareholders. Therefore managers ought to be responsible for the long-term maximization of shareholders' profit and should exercise fiduciary duty towards shareholders. Moreover, managers, as the shareholders' trustees, must be fully accountable to shareholders for their actions as well as their performance. In the Japanese corporate system, the corporate governance function by definition rests with the board of directors, who are elected to represent the shareholders. The directors are entitled to govern the company, and to supervise and monitor the company's managers in order to promote effective management and ensure accountability to the shareholders. The board of directors therefore is the primary overseer of the company, monitoring management to ensure that it continually endeavors to maximize long-term corporate value for the shareholders, and is always accountable for its actions to all stakeholders, in particular the shareholders. In reality however, in Japan the respective roles of directors and managers have not necessarily been clearly defined. Furthermore, the distinction between the governance role of the board of directors on the one hand, and the management role of managers on the other is complicated by the existence of a separate board of auditors, whose role is to audit the activities of the management. This body has meant that in practices the Japanese board of directors has not necessarily been equipped with sufficient governance authority or capability, while the board of auditors has been little more than a cosmetic shell. The corporate governance principles described herewith propose that the governance powers of the board of directors be firmly established, thereby guaranteeing both the effective management and prudent accountability the company needs to survive in the global marketplace.
JEL Classification: F36, F39, G32, G34
Suggested Citation: Suggested Citation