Recent Boardroom Reforms in Japan and the Roles of Outside/Independent Directors

In recent years, Japan has been working on corporate governance reforms, focusing on the roles of outside/independent directors. Among others, the 2014 Reform of the Companies Act and the 2015 Japanese Corporate Governance Code introduced “comply or explain” rules regarding appointment of one outside director or two independent directors, respectively. These reforms turned out to be quite effective. Within the companies listed in the First Section of Tokyo Stock Exchange, the ratio of those appointing one or more outside directors jumped up from 48.5% in 2010 to 55.4% in 2012, 74.3% in 2014, and to 98.8% in 2016. It is still quite rare, however, for Japanese companies to appoint more outside/independent directors to reach one third or majority of their boards of directors. While such reforms focusing on board independence may seem to be in line with the global trend since the UK’s Cadbury Report in 1992, although at a quite modest rate, it does not necessarily follow that the reason of having these reforms are also similar to those of other jurisdictions. Unlike many other corporate governance reforms around the world, the recent reforms in Japan are not responses to corporate scandals. Rather, the current government emphasizes corporate governance reform and board independence as a key to revitalize Japanese economy. The problem is that it is not so clear how outside/independent directors can contribute to increase corporate value and overall economic growth. After describing the situation before and the contents of the recent reforms, this paper analyzes the various roles expected to be performed by outside/independent directors in Japan and argues that more attention should be paid to the possible intra-jurisdictional divergence in addition to the inter-jurisdictional difference regarding outside/inside directors.