Corporate Governance In Japan: One Year Later.

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Asia Pacific Legal Updates


12 August, 2016


In July 2011, former Olympus President Michael Woodford opened his inbox to discover several emails forwarding a story from Japanese business magazine, Facta. The magazine had reported on suspicious fees Olympus had paid to acquire Gyrus, a medical technology developer, including a US$687 million “advisory fee” to a Cayman Islands registered company.


This led Woodford to question further the company’s acquisition of non-core businesses, including a mail order face cream company and microwave cookery company, in addition to Gyrus. Such questioning ultimately led him to be ousted as President and CEO of the company in October 2011.


The Olympus acquisitions snowballed into Japan’s largest corporate scandal. An investigation revealed that these transactions were made in an attempt to hide investment losses that went back to the bubble economy of the 1980s.


“When I go to Japan, I’m treated by men and women in the street with great friendliness and warmth,” Michael Woodford told FTI Consulting almost five years after the incident.


“However, I would estimate 80% or more of Japanese corporate leaders consider that I betrayed my company and bit the hand that fed me.”


The Olympus incident was not the first major Japanese corporate scandal, nor was it the last. A number of other scandals over the years have highlighted Japan’s lax corporate governance standards:


  • In 2006, the internet company Livedoor used stock splits, swaps and share purchases to boost its share price. As a result, the founder, Takafumi Horie spent two and a half years in prison and the company was delisted from the Tokyo Stock Exchange.
  • In 2013 a consumer finance firm affiliated with one of Japan’s largest banks was found to have loaned more than US$2 million to people affiliated with the Yakuza (Japanese criminal organisation). It was later revealed that senior executives within the bank were aware of these loans.
  • More recently, in 2015 it was found that electronics maker Toshiba had falsified accounts for seven years, inflating profits by over US$1.2 billion.


Calls to improve Japan’s corporate governance record were fueled in part by scandals such as the above, and four years later, Japan began reform with the introduction of a Stewardship Code in 2014 and a Corporate Governance Code in 2015.


When I go to Japan, I’m treated by men and women in the street with great friendliness and warmth. However, I would estimate 80% or more of Japanese corporate leaders consider that I betrayed my company and bit the hand that fed me.

— Michael Woodford, ex-Olympus CEO 


Overview of the Code


Japan’s corporate governance reform falls under the third arrow of Prime Minister Shinzo Abe’s economic policy, termed “Abenomics.” The third arrow, structural reform, is a growth strategy that follows the first two arrows: fiscal stimulus and monetary easing.


There are two aspects to Japan’s corporate governance reform: The Stewardship Code, which was published by the Financial Services Agency on 26 February 2014, and the Corporate Governance Code, which came into effect on 1 June 2015.


While both codes aim to improve corporate governance practices in Japan, the fundamental difference between the two is that the Stewardship Code seeks engagement from institutional investors while the Corporate Governance Code targets company boards. Both are not legally binding and follow the “comply and explain” principle seen in the U.K.’s


Corporate Governance Code.


Implementation of the Code


On 1 June 2015, Japan’s Corporate Governance Code went into effect. Listed companies that hold their Annual General Meetings in June were required to submit corporate governance reports in December 2015 during the first year of implementation.


According to data released by the Tokyo Stock Exchange in January 2016, out of 2,485 listed companies that submitted reports, 1,858 were in the 1st and 2nd Sections of the Tokyo Stock Exchange. 11.6% of these companies (216 companies) declared compliance with all principles of the code while 88.4% (1,642 companies) gave explanations for non-compliance of some of the principles. Principles that had a high explanation rate in particular were board evaluation at 63.6% and had two or more independent directors on the Board at 42.5%.1


Compliance Rate of the Corporate Governance Code2


Are the Reforms Working?


Over the past year, progress has been seen in improving Japan’s corporate governance profile. For example, the practice of listed companies showing analysts early peeks of their results before they are released to the public, due to lax fair disclosure laws that allow companies to selectively share information with whomever, is now in decline. Brokerages are increasingly banning their analysts from talking to companies to obtain previews of earnings results.


FTI Consulting spoke to a senior Japanese business man who serves as an independent advisor and board member in Japan who stated that he had seen improvements made in the last year.


For example, in late March, activist investor Dan Loeb intervened to stop a plan by the then Chairman and Chief executive Officer Toshifumi Suzuki of Seven & i Holdings Co. to remove convenience store unit president Ryuichi Isaka from power.


However, some issues remain when it comes to improving Japan’s corporate governance, according to Michael Woodford, who believes that the answer to improving corporate Japan would be legislation to facilitate and allow hostile takeovers.


Corporate Governance Code Stewardship Code

Engagement from the company board


Engagement from institutional investors


Securing the rights and equal treatment of shareholders

Monitoring of investee companies


Active disclosure of financial and non-financial information to serve as a basis of constructive dialogue with shareholders

Public disclosure of how they fulfill their stewardship responsibilities

Dialogue with shareholders

Dialogue with investee companies

Cooperation with stakeholders other than shareholders (i.e. employees, customers, business partners)

Clear policy on voting and disclosure of voting activity

Appointment of at least two independent directors


Policy on managing conflicts of interest

Establishment of whistle blowing framework

Knowledge of investee companies

Not legally binding — “comply or explain”

Not legally binding — “comply or explain”


While the corporate governance code in itself is a good thing and should be welcomed, I believe in reality it does not address the deep-rooted societal issues in corporate Japan which lie at the heart of governance problems in the country.
— Michael Woodford, ex-Olympus CEO


“While the corporate governance code in itself is a good thing and should be welcomed, I believe in reality it does not address the deep-rooted societal issues in corporate Japan which lie at the heart of governance problems in the country,” said Woodford.


For the roughly 3,500 companies listed on the Tokyo Stock Exchange, implementing corporate governance reforms within the company isn’t a simple matter.


“Such a system is seen to be driven from outside from a Japanese standpoint,” said a Japanese businessman who formerly served as a board member of a major corporation.


“Japanese companies want to be a member of the global world and the introduction of a corporate governance system is seen as being just for global business. Some Japanese companies still operate with a very domestic mindset despite their operations being very much international.”


Below, FTI Consulting has highlighted several issues that remain in terms of improving Japan’s corporate governance:

Board Structure and Diversity


Although listed companies are beginning to open up their
boards to outside directors, this does not necessarily mean the spirit of corporate governance is being realised. The

qualification of these appointees and the extent of their influence are questionable. At the time of its accounting scandal,

Toshiba had four independent directors. However, two of them were ex-diplomats with little business experience.


In addition, although Mitsubishi Motors, currently embroiled in a scandal over overstating the fuel economy of its minicars, had four independent directors on its board, three of them were actually affiliated with Mitsubishi group. In order to provide an independent perspective that will benefit the board, firms need to bring in outside directors that are not only truly independent, but are also knowledgeable about the business and can challenge the Board and executives when the need arises.


For example, in the U.S., active CEOs are the largest source of new independent directors. According to the 2015 Spencer Stuart Board Index, 53% of new independent directors were active senior executives and professionals.3 


“I think it is abnormal,” commented an independent director on the board of a Japanese company who admitted, “I think that it’s the biggest problem that Japan needs to improve on.”


Furthermore, much needs to be done to increase the diversity of the Boards. According to Catalyst, an organisation which promotes inclusive workplaces for women, women hold only 3.1% of board seats among Japan’s 30 largest companies, which is a far cry from the 30% Abe hopes to achieve by 2020.4 In addition, more board seats should be given to foreigners, as foreigners are less pressured to avoid asking difficult questions and are not hindered by the social and cultural norms faced by their Japanese counterparts.




An important part of Japanese business culture is cross- shareholding, a practice in which companies hold shares in each other. The practice has been hard to stamp out because proponents claim that it is a way for companies to strengthen business relationships with each other.


There have been positive moves to put an end to this practice. Japan’s corporate governance code requires companies to disclose policies on cross-shareholdings and the exercise of voting rights. Japan’s three largest banks, Mizuho, Sumitomo Mitsui and Mitsubishi UFJ Financial Group have all accelerated targets to sell their cross-shareholdings.

On the other hand, due to a concern that activist investors are becoming more vocal, many firms are reluctant to part with their friendly shareholdings as a way to protect themselves.


Press Freedom and Transparency


The media can play a role in corporate governance by driving politicians to introduce or enforce corporate laws. In addition, the media can shame companies into practicing good corporate governance in order to protect their public image.


Japan plummeted 11 places in the 2016 Reporters Without Borders World Press Freedom Index to 72nd place.5

However, the mainstream press, dependent on advertisement revenues, tends to shy away from reporting on issues that can cut their source of funding.


A State Secrecy Law, passed in late 2013 despite strong protests and backed by Prime Minister Shinzo Abe, punishes journalists with a five-year prison term for leaking state secrets.


While improving Japan's corporate governance is at the top of Abe’s policy agenda, his attempts to muzzle the press

serves as Abenomics’ own greatest impediment. 


Corporate Culture


According to Michael Woodford, the single most important problem facing Japanese corporations is societal, rather than structural.


“I made a lot of noise, spoke out with a loud voice and despite the purpose of this being to expose a near US$2 billion fraud, my behaviour is frowned upon,” said Woodford, whose actions were seen by some as nonconforming, especially in a business environment where maintaining the status quo and harmony is important.


According to the Investigation Report compiled by the independent committee hired to investigate Toshiba’s accounting fraud, one of the biggest problems within the company was a corporate culture that put pressure on subordinates to hit unrealistic sales targets.6 These targets were sometimes issued before the end of a fiscal quarter or year, encouraging divisions to cook the books.


Changing the culture of a company is not so easy, according to a former board member of a corporation known for its deeply traditional corporate culture.


“Most companies were started after the war. Before that they were all individually owned,” he said. “The way of thinking cannot be changed easily.”


“In corporations what is common is a ‘blind’ obedience to the hierarchy, and that white collar crime is often considered something which does not damage anyone and has no victims. What’s paramount is loyalty to the company which can easily become ‘blind’ and unquestioning, where the rights and wrongs of any particular issue can so easily become lost,” said Woodford. 


1 att/20160120-2.pdf 

2 Ibid. insight%


4 directors


For further information, please contact:
Greg Hallahan​, Senior Director, FTI Consulting