Introduction of the Monitoring Model for Corporate Governance in Japan

ABSTRACT As for the legal form, the monitoring model for corporate governance was introduced, but not mandated, in the Japanese Commercial Code by the amendment of the Act on Special Measures for the Commercial Code on Audit, etc. of Stock Company in 2002. It was named "Company with Committees ", and there were Executive Officers besides Directors, but without Company Auditors. There were three committees organized by Directors, and they were Nominating Committee, Audit Committee, and Compensation Committee. The scheme is implemented, but still not mandated, in the Companies Act of 2005. However, if the monitoring model means that the major role of the Board of Directors should be the supervision of the execution of business conducted by the Executive Officers, monitoring model in substance, has been introduced in Japanese business in 1997. Although there are only sixty three listed companies, less than two percent of the listed Japanese companies, are Companies with Committees, majority of Japanese companies seems to have adopted monitoring model in substance by introducing holding company scheme or executive officer scheme. This paper reveals the current situation of the introduction of the monitoring model for corporate governance in Japan based on the economic substance. INTRODUCTION When monitoring model is adopted, the role of the board of directors will be to hire, compensate, and terminate the CEO and other senior officers, to check on the corporation's auditing process, to vote on conflict of interest transactions, and act on the most important corporate decisions. The board will not actually manage the corporation nor engage in strategic decision making (Mitchell, 2005, 5-6). It is now a dominant model of the board for large American corporations (Mitchell, 2005, 1). In Japan, Act on Special Measures for the Commercial Code on Audit, etc. of Stock Company was amended in 2002, and the monitoring model as a legal form was introduced, but not mandated. And the monitoring model, based on Companies Act, was not selected by the vast majority of the Japanese companies. According to the list of Companies with Committees (legal form for the monitoring model in Japan) by the Japan Corporate Auditors Association, there were only 102 companies including 39 non listed companies that chose HNKAI SECCHI GAISHA (Companies with Committees), on November 19, 2010. Among them, 11 were Hitachi group companies and 14 were Nomura group companies. Among those 102 Companies with Committees, 45 companies, including 11 Hitachi group companies, were listed in the First Section of the Tokyo Stock Exchange. But that number was less than 3% of total number of the listed companies (1,675) in the First Section of the Tokyo Stock Exchange at the end of October 2010. But above mentioned data does not necessarily mean that the monitoring model is not adopted in Japan. Even if the legal form of the monitoring model is not adopted, as long as the execution of the business and the supervision of the business are separated by the introduction of SHIKKO-YAKUIN (executive officers), it can be considered as introduction of the monitoring model in substance. In this paper, monitoring model in the companies act will be analyzed first, and then monitoring model in substance will be analyzed. Although some studies such as Gilson & Milhaupt (2004), Tatsuta (2005), Shishido (2008) describes the details of the changes in Japanese company law, prior studies of the Japanese corporate governance written in English are still limited. As for the major Japanese companies, NIKKEI 225, the ratio of companies that have introduced monitoring model in substance, was much higher than the data presented in the prior studies, which included wider range of companies. MONITORING MODEL IN THE COMPANIES ACT Act on Special Measures for the Commercial Code of 2002 By the amendment of the Commercial Code in 2002, Section 4 was added to the Chapter 2 of the Act on Special Measures for the Commercial Code on Audit, etc. …