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Companies Set About Reforming Boards of Directors

November 13, 1997

Businesspeople are adopting to a corporate pyramid with a narrower top. (Photo: Kyodo)

Moves to reform their boards of directors are gathering momentum rapidly among Japan's leading companies. Against the background of the arrival of an age of global megacompetition and other factors, many companies are seeking to give their number of directors a trim and install small boards. Their aim is to clarify the powers and responsibilities of the boards, speed up their business decision-making, and strengthen their corporate governance. The common characteristic of this trend is that in defining the role of the new board, Japanese companies are referring to the U.S. model but adding features suited to Japanese customs.

Downsizing the Boards
In Japanese business circles, the number of companies that are downsizing their boards has been increasing rapidly of late. According to the results of a survey conducted by a leading newspaper, after the holding of shareholders' meetings by the end of June of this year, of 1,786 surveyed companies listed on the Tokyo Stock Exchange, the number of firms that had reduced their number of directors and auditors reached 554, up 60 from the previous year. The average number of directors and auditors per company fell to 19.93 persons, down 0.11 from the previous year. Since there is a tendency for companies to raise the number of auditors in order to strengthen business surveillance, it is the directors who have been the targets of cuts.

In these circumstances, the case of a large electronics maker, which set about a structural reform of its management at the end of June of this year, has attracted much attention. The new corporate structure of this company has involved reducing its number of directors, giving the board the main task of drafting business strategy, and entrusting responsibility for business operations not with the directors but with a newly established executive board. As a result, the company has been able to reduce the number of directors by 28 persons--from 38 to 10. Thirty-four persons have been appointed as executive board members, including both retired directors and new appointees.

More than 70% of the total sales of this company's group, both domestic and international, comes from outside Japan. The company's business covers an extremely wide range, including not only hardware, such as audio and visual equipment, but also software, including movies and music, as well as digital satellite broadcasting, game equipment, and insurance. In order to respond to the globalization and diversification of these businesses in an age of worldwide megacompetition, the company explains that it is necessary to share the burden: Directors are responsible for the business of the group as a whole and executive committee members take charge of their respective areas. And the board of directors has been trimmed so as to speed up business decision-making. From the perspective of corporate governance, in order also to strengthen the mutual check among directors, the company obviously decided that the board would function better with a limited number of directors.

In addition, there is a general trading company that intends to formulate a reform plan for its board of directors by the end of the year, based on the premise of reducing the number of directors by 20%; a cosmetics maker that will cut its number of directors by one-third over the next two or three years; and a photo film maker that will trim its board by a quarter in the medium term. The rush to give boards of directors a face lift is truly on.

U.S. Corporate Model with Japanese Additives
Under the Japanese Commercial Code, the positions of employees who are recruited at the company's judgment and directors who are chosen at shareholders' meetings are strictly divided. Also, it is stipulated that a board of directors has two powers--to monitor the implementation of the company's business and to facilitate directors' carrying out the duties of their post. In practice, however, the division between directors and employees in Japanese companies is not very clear. The position of director is often seen as an extension of the career of an employee rising from clerical chief to section chief, department head, and beyond.

Furthermore, the number of directors in Japanese companies is large. In the finance, general trading, and construction industries especially, there are many firms that have as many as 50-70 directors, because they believe that these people must have a title for business purposes. As a result, the authorities and responsibilities of the board of directors are blurred in Japanese companies, and decision-making takes time.

Companies have set about reforms with the aim of vitalizing their boards. In doing so, they have generally taken U.S. firms as the model. In the United States, the functions of drafting business strategy and implementing business are clearly separated, and since importance is placed on the function of checking business implementation, companies often have many external directors.

For example, one well-known multinational computer maker has only 11 directors; the vice-president and other officers who are not directors have responsibility for the implementation of business. Moreover, of the 11 directors, 10 come from outside the company. In Japan, by contrast, even in the case of the above-mentioned electronics firm, which has embarked on a sweeping reform of its board, only 3 out of the 10 directors are external directors. The company obviously judged that it was necessary to have a majority of internal directors who have a good grasp of the industry and corporate situation. This company has also let executives who are not directors keep the titles of "executive director" or "managing director" in order to maintain morale in the upper ranks and in consideration of relations with clients and others outside the company--a very Japanese-style feature.

Japanese companies have begun taking steps toward the reform of their boards of directors. From now on, they will be searching for ways to combine American and Japanese styles of management.

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Trends in Japan Edited by Japan Echo Inc. based on domestic Japanese news sources. Articles presented here are offered for reference purposes and do not necessarily represent the policy or views of the Japanese Government.
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