The Japan Business Federation (Nippon Keidanren) comprises 1,541 major Japanese business firms and industrial associations. The following opinion reflects the results of deliberations held regarding the OECD Principles of Corporate Governance Draft Revised Text (January 2004) by the Sub-committees on Corporate Governance and Corporate Law of the Japan Business Federation's Committee on Economic Law.
In Japan, ongoing efforts to address issues of corporate governance have been based on the view that there is no single model of good corporate governance, as mentioned in the current Principles. As in other countries, it is considered desirable that the market be entrusted with evaluation of corporate governance systems, on the premise that corporations will disclose their systems.
Similarly, we would find it desirable for the OECD to continue to adhere to the above position in the latest revision of the Principles and Annotations (Annotations to the OECD Principles of Corporate Governance), namely, that it would respect the diversity of existing corporate governance systems and refrain from seeking to prescribe best practice. This is advisable because respect for historical developments of the regulatory systems of different countries, and the cultural backgrounds of these, as well as for the diversity of corporate activities under such systems, has been a driving force of business creativity. This creativity has played a valuable central role in contributing to national economic development through companies' long-term growth. We request that work on the revision does not, in an attempt to draft detailed Principles and Annotations, seek convergence on a single model of corporate governance practice or patterns of action that are being followed in particular countries. In accordance with our stance that the OECD should not act as a de-facto regulator, we would like to comment as follows.
Some have contended that there is a linkage between corporate governance on the one hand and "economic efficiency and growth," "protecting private savings" and companies' competitive strength. As indicated in the Survey of Corporate Governance Developments in OECD Countries, however, a number of limiting conditions attach to these assertions, which have yet to pass the test of conclusive empirical analysis. Moreover, more than a few theses arrive at other conclusions. Despite that inconclusive debate on the issue, the second paragraph of the draft revised text presents a conclusive pronouncement: "One key element in improving economic efficiency and growth as well as protecting private savings is corporate governance." Further, the ninth paragraph holds that "To remain competitive in a changing world, corporations must innovate and adapt their corporate governance practices so that they can meet new demands and grasp new opportunities." Both of these pronouncements should be removed.
The current Principles place the main focus on the relation between shareholders and management. While acknowledging the existence of other related parties, it avoids unnecessary specific references. As a result, clarity is much enhanced across the differences between jurisdictions and cultural factors of individual countries. Corporate stakeholders comprise executive officers, directors, and shareholders, as well as creditors, employees, accountants, analysts, and a range of other related parties. The purported functions and rights of these constituencies are, however, different from country to country. We request that the revised Principles do not sacrifice this clarity by expanding the scope of covered functions held by a multiplicity of related parties.
Section B subsumes "the transfer of assets" under "extraordinary transactions." However, only small parts of "the transfer of assets" fall into the category of "extraordinary transactions." The concept of impairment of shareholder capital is also unclear. The current version of the Principles should therefore not be altered.
The first paragraph of annotations to section C.3 stipulates "full disclosure of the experience and background of candidates for the board" in addition to the process of nomination of board member candidates. It is sufficient for shareholders to have information enabling them to vote for or against a proposal, and further, the scope of disclosure can be different from country to country and between corporations. This proposition should be removed.
The second paragraph of the annotations to section C.3 calls for disclosure of the connection between remuneration and company performance. It is our understanding that in European and US cultures, corporations offer high amounts of compensation to hire outstanding executives in order to achieve superior business performance. In Japan, however, the posts of corporate officers are tied in with long-standing, in-house promotion systems, and compensation amounts are not high as those in Europe and the US. For this reason, we do not consider this type of information essential to shareholders. We believe that this requirement is predicated on a one-sided view and thus inappropriate. It should therefore be removed.
Also removed should be the proposition in section F.1 that "The voting record of such (institutional) investors should also be disclosed to the market on an annual basis." No definition is provided of institutional investors having fiduciary responsibilities, and in the case of institutions acting at their own discretion, no clarity exists over the relation between disclosure of voting record and the duty of confidentiality toward their beneficiaries.
This latest draft revision of the Principles is based on a survey conducted between 2002 and 2003. As an example for disclosure of voting records of institutional investors having fiduciary responsibility, the survey's findings take up US mutual funds. However, in the US, upon implementing the mandatory disclosure of mutual funds' voting records, the SEC solicited public comment, and many saw this as a harmful practice and remain opposed to it. Disclosure of voting records was enacted in February 2003, but will not be implemented until August 2004. Hence, since there is still no precedent, evidence has yet to emerge that the positives of the practice will outweigh the negatives that have been pointed out by opponents of the measure. We believe it is inappropriate for the revised Principles to incorporate matters like these that remain to be verified.
The second paragraph of the annotations to section F.1 holds that "Such a dialogue between institutional investors and companies should be encouraged, especially by the regulatory system." This proposition amounts to excessive government interference and signifies action that contradicts with market principles. It also contravenes equitable treatment of shareholders and should therefore be removed.
The third paragraph of the annotations to section A.2 holds that "Other means of improving minority shareholder rights include derivative and class action lawsuits." This perception is flawed, however, because derivative lawsuits are not a means to improve minority shareholder rights, but rather, intended as a system for the recovery of damage a company has sustained.
Moreover, Japan has adopted an appointed party system under which participating plaintiffs are appointed from among shareholders who can represent their common interest. Based on lessons learned from the US, this system is different from the class action suits whose misuse has become problematic in the US, and is designed to avoid the negative experiences of the US. Instead of the term "class action suit," a concept which has become problematic through misuse, we propose that the wording of the revised Principles should select an expression relating to litigation on behalf of shareholders' common interest.
Furthermore, in its White Paper on Corporate Governance in Asia, the OECD observes that "critics point in particular to shareholder suits' potential for excessive or frivolous litigation." It continues that "each legal system must try to strike a balance between allowing investors to seek remedies for infringement of their rights and avoiding excessive litigation." These discussions suggest that the annotation should include an addition to the effect that "Shareholders shall not engage in excessive or frivolous litigation."
We object to section C in that, while the current Principles afford stakeholders participation in performance-enhancing mechanisms, the revision attempts to narrow such participation to employees. Certainly, it would be inappropriate if creditors were to interfere in the management of a financially healthy business. In relation to mechanisms to enhance performance, however, involvement from varied stakeholders is possible. Assuming that provisions concerning stakeholders, compared with other stakeholder-related stipulations, were limited exclusively to employees in these matters, this might be seen as a form of privileged employee participation.
As specific case-examples of mechanisms to enhance performance, the annotations to section C mention in particular employee representation on boards and governance processes such as works councils that consider employee viewpoints in certain key decisions. However, any of these concepts would be difficult to implant into the framework of the customary labor-management dialogue that permeates Japanese corporations, and should therefore be removed from the case-examples provided in section III.C.
In 2002, Japan's Commercial Code underwent a revision of provisions that until that point had restricted the scope of stock option grant beneficiaries to directors and employees. This revision made it possible to grant stock options also to directors and employees of affiliates, as well as to advisors of the company. In other words, the revision introduced eligibility for stock option grants for related parties who can contribute to the growth of companies. Thereby, companies that cannot easily raise funds on the merits of tangible assets as collateral can receive the advice of able parties by granting stock options. Any revisions that purport to introduce restrictions on such arrangements are not acceptable. The current version of section C of the Principles should therefore not be amended.
Although we endorse the content of section E, the term "ethics" indicates different notions depending on the country or region. Since we are concerned that there may not be a sufficiently shared universal concept of ethics, we maintain that this term should be removed.
As to section F, matters of bankruptcy law are not central to corporate governance. Nor can one necessarily claim that an endorsement of "enforcement of creditor rights" would lead to corporate governance reform. Including all these points in the revised Principles would over-extend the scope of the issues, and will only serve to diffuse the Principles' focus. This step would also contravene the policy set forth in the Preamble, under which the Principles focus on governance issues resulting from the separation of ownership and control. This proposition should be removed.
Section A.4 requires board members to make disclosures of "their qualification [and] the selection process." Owing to its vagueness, this concept should be deleted.
The third paragraph of annotations to section A.4 calls for disclosure of the connection between remuneration and company performance. It is our understanding that in European and US cultures, corporations offer high amounts of compensation to hire outstanding executives in order to achieve superior business performance. In Japan, however, the posts of corporate officers are tied in with long-standing, in-house promotion systems, and compensation amounts are not as high as those in Europe and the US. For this reason, we do not consider this type of information essential to shareholders. We believe that this requirement is predicated on a one-sided view and thus inappropriate. It should therefore be removed.
It would appear that describing disclosure of corporate officers' individual remuneration as "increasingly regarded as good practice" amounts to a recommendation of the practice itself. At least in Japan, however, opinion remains divided on how to reconcile the positive effects of disclosure with the values connected to the protection of privacy. We believe that these recommendations should be removed.
As for section B, we endorse the view that conversion of individual national standards to an internationally recognized standard should be pursued in order to promote the globalization of finance, facilitate fundraising by corporations, and lighten the burden on corporations from having to accommodate different sets of disclosure rules in their disclosures activities. Currently, however, there exists no "internationally recognized" standard that could be shared by all OECD countries. The phrase "internationally recognized" should be added only after agreement on an internationally recognized standard has been reached among the involved countries. As for now, its usage is not appropriate and it should therefore not be included in the revised text of the Principles.
We would endorse the content of section F. However, real-world requirements on matters regarding analysts, brokers, rating agencies, etc., are broader in scope than those stipulated. Including these specific provisions in the revised Principles would indicate that the revised Principles limit the scope of responsibilities of these parties and diffuse the focus of the Principles. We recommend removal of these requirements.
Section C requires the board to adhere to "high ethical standards." We are concerned that there may be no sufficiently shared universal concept of "ethics." The current proposition of the Principles in terms of ensuring compliance with applicable law should not be modified.
Section E requires independence from controlling shareholders. However, from the start, boards are expected to serve and take duties upon themselves for the benefit of all shareholders. This requirement should therefore be removed.
The first paragraph of annotations to section E requires boards "to have non-executive board members." Since this is not applicable in instances of legally required mutual supervision among board members, this requirement should be removed.
Section E.1 gives examples of cases in which "independent judgment" should be undertaken by "a sufficient number of non-executive board members." This proposition should be removed. Such cases require expert judgment. Requiring non-executive board members to judge such cases may lead to inflation of their remuneration, and such high remuneration in turn could cause concern over their independence from the executives. In particular, non-executive board members would find it difficult to exercise informed judgment regarding board nomination and executive and board remuneration, since they are inexperienced in the practice of execution of operations.
Annotations to section E.1 assert that "independent non-executive board members can provide additional assurance to market participants." On the contrary, a lack of assurance may ensue on the part of investors if company management is occupied by independent non-executive board members who are inexperienced in business management. Moreover, more than a few companies with predominantly executive board members have been successful in achieving higher corporate value than others. This requirement should be removed.
The second paragraph of annotations to section E.3 endorses the usefulness of in-house training and external courses for board members. This is not in the best interest of shareholders, however, since the concomitant cost has to be borne by the company. The capability to exercise their jobs should be required of board members, without incurring such cost to the company. This proposition should be removed.