Sweeping Changes in Japan Governance Landscape, ICS Analysis Finds

Outside Director Board Attendance Among Areas Showing Rapid, Significant Improvement

ROCKVILLE, Md. (June 20, 2016)  – Reforms spurred by “Abenomics” and the launch in Japan of a new governance code for corporations is spurring change in the world’s third largest economy, according to a recent analysis by ISS Corporate Solutions, Inc., a leading provider of corporate governance  tools and advisory services to help companies improve shareholder value and reduce risk.

In examining company filings in the run-up to Japan’s peak annual shareholder meeting date of June 29, ISS Corporate Solutions finds companies are generally heeding the demands of investors as evidenced by the earlier delivery of meeting materials, an increase in the prevalence of outside and independent directors, improvements in outside director attendance, and an uptick in the number of female directors.

Earlier Delivery of Meeting Materials

A decade ago, Japanese companies released proxy materials on average 14.5 days before the meeting, barely meeting the minimum legal requirement of 14 days before the meeting. So far this year, the average lead time of proxy material filings stands at 22.1 days, the highest on the record by a wide margin, according to ISS Corporate Solutions. Moreover, 62.5 percent of companies this year have filed proxy materials three weeks before the meeting or earlier, compared with just 34.4 percent last year.

“While the lead time for filing annual meeting materials has improved incrementally over recent years, we are now seeing a significant jump thanks in large measure to the Corporate Governance Code recommending early release of proxy materials,” said Jun Frank, Principal Advisor at ISS Corporate Solutions, a corporate governance consultancy with offices in Tokyo.

A Growing Number of Outside Directors and Independent Directors

One long-standing criticism of Japanese corporate governance, particularly among foreign investors, has been its insider-dominated boards. Indeed, as recently as 2012, most Japanese boards had no outsiders on the board. Thus far in 2016, however, almost all large capital companies have two or more outside directors, according to ISS Corporate Solutions, and many now have four to five outside directors on the board.

“Many of these outside directors also exhibit high levels of independence, often meeting or exceeding the strict definition of independence set by corporate governance observers including proxy advisers,” said Frank.

Improvement in Outside Director Attendance

Not only are there today more outside directors on the boards of Japanese companies, more are actively attending board meetings. Outside directors with low attendance (defined as an attendance rate below 75 percent) has declined from 6.8 percent of incumbent outside directors in 2014 to 5.0 percent in 2015 and now stands at just 3.0 percent.

“This emerging trend suggests that outside directors are becoming more conscious of their duties as an outside director, and that board meetings are conducted in a manner that allows for greater participation by outsiders,” said Frank.

Uptick in Number of Female Directors

Japanese boards remain male-dominated, though change is afoot. The administration of Prime Minister Abe has pushed for greater female participation in decision-making roles, and the new Corporate Governance Code recommends greater board diversity, including gender diversity. Although women directors still comprise a small minority, they now represents 3.4 percent of the board on average, compared to 2 percent in 2014 and 2.8 percent in 2015, according to ISS Corporate Solutions. Meanwhile, the prevalence of boards without any women is declining steadily, from 86.9 percent in 2014 to 74.7 percent of companies so far this year.

“Japanese companies still lag below the global standard on board independence and diversity; however, we are now seeing concrete evidence of change and the change is happening at an extraordinary pace for traditionally slow-to-change corporate Japan,” said Frank.