2010 Survey on Corporate Governance of Listed Corporations

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1 Japan Association of Corporate Directors(JACD) 2010 Survey on Corporate Governance of Listed Corporations Survey summary: To make fixed-point observations of both the efforts towards and processes related to the establishment of Corporate Governance systems at listed corporations in Japan particularly from the viewpoint of independent directors, as well as to contribute to domestic and overseas investors, and to those involved in corporate management. Survey subject: Corporations listed on the first section of the Tokyo Stock Exchange, constituents of the Nikkei Stock Index 300 () and member corporations of JACD. Data source: : Secondary data based on Securities Reports (gathered primarily in late July 2010) : Corporate Governance Report of the Tokyo Stock Exchange (hereinafter referred to as the TSE), Notice of Independent Directors, NIKKEI NET (gathered mainly in late July 2010) Contents 1. INDEPENDENT DIRECTORS OUTSIDE DIRECTORS COMPANIES WITH COMMITTEES CORPORATIONS IN WHICH FOREIGN INVESTORS HOLD 30% OR MORE OF EQUITY MEMBER CORPORATIONS OF JACD... 7 Japan Association of Corporate Directors (JACD) JACD is aimed at contributing to the sustainable development of corporations and managerial efficiency through the enhancement of Corporate Governance with the ultimate goal being subsequent Japanese economic growth. As the only association in which top management, experts, academics, independent directors and institutional investors gather, JACD is a forum that has gained a high level of satisfaction by its members due to it being a place where they can take part in the exchanging and obtaining of information through means of discussion. In particular, the association is a very useful society for independent directors themselves, as well as corporations that have introduced independent directors. JACD holds 100 or more meetings and discussions every year concerning all fields related to management, and also focuses on the nurturing of the executives of participating corporations. JACD was established on March 13, It obtained the status of a limited liability intermediate corporation on April 1, 2002, and shifted to a general incorporated association on January 21, Its chairman is Yoshihiko Miyauchi (Chairman, ORIX Corporation). The URL of the association is Contact: Tel.: ; info@jacd.jp Japan Association of Corporate Directors 1

2 1. INDEPENDENT DIRECTORS Independent directors are defined as directors who are independent of top management or specific interested parties 1. The Japan Association of Corporate Directors proposed that the principal role required of independent directors of companies should be to present an appropriate corporate posture within the company from the viewpoint of the company s sustainable and long-term development and the enhancement of its corporate value. This applies even in cases where the internal directors are unable to act appropriately alone due to constraints and other internal circumstances 2. Real independence is required of independent directors. Although there is a limit in respect to how this can be specified as a formal requirement, there are cases where clear questions pertaining to real independence will very likely arise. Such examples of this include: shareholding relations, trading relations, relationships of relatives, the relationship between parents and subsidiaries and pecuniary relations. Here we will assume the directors are not executing business and will touch upon the less independent outside directors later on in this document. Situation in 2010 A. Corporations that have appointed independent directors The number of corporations that have appointed independent directors is 529 among companies listed on the first section of the TSE, and 172 among constituents, which are representative corporations of Japan. B. Number of corporations by number of independent directors appointed (Unit: Company) No. of Independent Directors , C. Number of corporations that have appointed independent directors The number of corporations that have appointed independent directors is 529 among companies listed on the first section of the TSE, and 172 among constituent corporations. D. Total number The total number of independent directors is 1,013 at corporations listed on the first section of the TSE and 452 at companies that constitute the. The actual number of independent directors, excluding those concurrently serving, is 882 at corporations listed on the first section of the TSE. 1 Independent Director Code in 2005, JACD 2 Interim Proposal on Independent Director (Outside Director) System in 2009, JACD Japan Association of Corporate Directors 2

3 2. OUTSIDE DIRECTORS An outside director is a post specified by the Companies Act. Outside directors are defined as directors of a stock corporation who are not/have not been representative directors, executive directors, executive officers, managers or any other types of employee of the company or its subsidiaries. Their role as supervisors that do not execute business is to provide direction to the top management of companies in regards to the validity or adequacy of their execution of business in light of management principles and basic policies of management. Changes from 2004 to 2010 A. Corporations that have appointed outside directors (Ratio) Ratio of Corporations that have appointed outside directors B. Corporations that have appointed outside directors (Number of companies) (Unit: Company) The number of corporations that have appointed outside directors drew to about half of the total. Corporations that have appointed outside directors have been accounting for about 70% of constituents, which are representative corporations of Japan, since Reference:Number of corporations listed on the first section of the TSE (Unit: Company) 1,610 1,664 1,706 1,726 1,723 1,698 1,672 (Year-on-year) Change Japan Association of Corporate Directors 3

4 C. Number of corporations by number of outside directors appointed (Unit: Company) 0 1,123 1,070 1, (955 (909 (868 1 person persons persons persons persons persons persons persons persons persons or more D. Average number of outside directors (Unit: Person) Average number of outside directors Reference: Average number of directors (Unit: Person) Those who have experience in serving as outside directors say that the appointment of multiple directors is necessary in order for governance to function. The average number of outside directors remains around two people. However, the ratio of corporations that have appointed two or more outside directors, which stood at 49% in 2004, was 54% in These figures indicate the difficulty in actually appointing multiple outside directors under the current situation. Japan Association of Corporate Directors 4

5 E. Total number of outside directors (Unit: Person) Total Total number number of of outside outside directors directors According to the electronic version of the Nihon Keizai Shimbun, dated June 15, 2010, the most common independent directors (outside directors and outside corporate auditors) are individuals who have previous work experience in the financial industry. Many talented people with a high-level of independence and expertise, including lawyers, accountants and university professors, are also frequently appointed as independent directors. 3. COMPANIES WITH COMMITTEES Changes from 2004 to 2010 (Unit: Company) The total number of companies with committees has remained unchanged since the implementation of the system in At many of corporations that have made the re-transition to being companies with a board of statutory auditors, management efficiency has advanced through such methods as the turning of companies into subsidiaries, mergers and acquisitions (M&A), and consolidation. Corporations that shift to being companies with committees utilize the system generally by establishing a holding company. Japan Association of Corporate Directors 5

6 4. CORPORATIONS IN WHICH FOREIGN INVESTORS HOLD 30% OR MORE OF EQUITY Changes from 2005 to 2010 Ratio of corporations in which foreign investors hold 30% or more of equity Number of corporations (Unit: Company) In this survey, the status of investment by foreign investors in the Japanese market, whom also impact Corporate Governance in Japan, has been recorded. In 2010, the number of corporations in which foreign investors hold 30% or more of equity rose to an extent, while the overall stock ownership by foreign corporations grew 2.5 percentage points from a year earlier to 26.0%, the first year-on-year increase in three years since fiscal However, compared with figures from 2007, the figures for 2010 cause the investment side that consists of the members of this association to voice misgivings about Japan passing (Passing up Japan and making investments in emerging countries in Asia and other regions.). As a means to beckon foreign investors, hopes are pinned on the fruition of more efficient management through the further improvement of Corporate Governance. As for the status of Corporate Governance at corporations in which foreign investors hold 30% or more of equity, 82 companies (54%) have appointed independent directors, while 101 companies (66%) have outside directors. These figures are higher than the averages among corporations listed on the first section of the TSE. Thirteen companies (7.1%) are those with committees. We may assume that such high ratios are as a result of response to demands from foreign shareholders concerning Corporate Governance. 3 TSE Fiscal 2009 Survey of Distribution of Shareholdings Japan Association of Corporate Directors 6

7 5. MEMBER CORPORATIONS OF JACD Here, a comparison is made between the constituents of, which are representative corporations of Japan, and corporations that are members of the Japan Association of Corporate Directors (of which, 67 companies that fall under the ). The ratio of member corporations that have introduced independent directors is 84%, which will rise to 90% or more when outside directors specified by the Companies Act are included. The average number of independent directors and that of outside directors exceed three individuals, which satisfies the number recommended by the proposal of the Asian Corporate Governance Association (ACGA) (in 2008) three or more. This proposal is a typical view of foreign investors. Moreover, there are many companies with committees and corporations in which foreign investors hold 30% or more of equity. This attests to the fact that many corporations that are highly conscious of and interested in Corporate Governance are among member corporations of the association. A. Independent directors Corporation with independent Average number directors 172 (57%) 2.6 JACD 58 (84%) 3.2 B. Outside directors Ratio of outside directors in appointing companies Japan Association of Corporate Directors Average number of outside directors per company Japan Association of Corporate Directors Japan Association of Corporate Directors 7

8 C. Companies with committees (Unit: Company) (6%) JACD (18%) D. Corporations in which foreign investors hold 30% or more of equity Ratio of corporations in which foreign investors hold 30% or more of equity Japan Association of Corporate Directors Reference: The definitions of outside director and independent director (outside director) Outside director In this survey, outside directors pursuant to the Companies Act (excluding those who are not/have not been representative directors, executive directors, executive officers, managers or any other employees of the relevant company or its subsidiaries) are counted based on the TSE Corporate Governance Report. Independent director In this survey, outside directors of the TSE Notices of Independent Directors are counted as independent directors. Those who fall under the following categories are excluded in the light of independence requirements: a1 a person who executes business of the parent company of a listed company; a2 a person who executes the business of a sister company of a listed company; b1 a person who does business with a listed company as a principal business partner, or a person executes business; b2 a principal business partner of a listed company, or a person who executes business; c a consultant, accounting expert or legal expert who receives large monetary sums or other property apart from the remuneration for being a director from a listed company; d a principal shareholder of a listed company; e1 a person who executes the business of a listed company or its subsidiary; e2 a director who does not execute business or an accounting consultant of a listed company or its subsidiary (in a case where an independent director is an outside corporate auditor). Japan Association of Corporate Directors 8