[2023 Financial Forum] Who and Why Were They Selected? Even 'Independent Director Report'... Talent Pool Remains a Challenge for Japan Too

The 12th Seoul Asia Financial Forum Held
'Desirable Financial Company Governance and Internal Control Systems'

"The Tokyo Stock Exchange requires listed companies to submit an 'Independent Officer Report' related to independent officers (outside directors and auditors) through its listing regulations. The report must detail who the appointed independent officers are, whether they can maintain independence from management, and the reasons for their appointment."

Professor Kawaguchi Yasuhiro of the Faculty of Law at Doshisha University in Japan stated this on the 25th at the Westin Chosun Hotel in Jung-gu, Seoul, during the keynote speech on the independent outside director system of Japanese financial companies at the '12th Seoul Asia Financial Forum.' He added, "The three major Japanese financial holding companies?Mitsui Sumitomo, Mizuho, and Mitsubishi UFJ Financial Group?are also listed on the Tokyo Stock Exchange Prime market and are therefore subject to such self-regulation."

Professor Yasuhiro Kawaguchi of the Faculty of Law at Doshisha University in Japan attended the "12th Seoul Asia Financial Forum" held on the 25th at the Chosun Hotel in Jung-gu, Seoul, and delivered a keynote speech on the topic of "The Independent Outside Director System of Japanese Financial Companies." Photo by Jinhyung Kang aymsdream@

Professor Kawaguchi introduced Japan's independent outside director system and explained the 'Corporate Governance Code (CG Code),' which the Tokyo Stock Exchange introduced in 2015 and has revised twice since. The CG Code specifies the roles of independent outside directors as ▲ advising on management policies or improvements ▲ supervising management ▲ overseeing conflicts of interest between the company, management, and controlling shareholders ▲ reflecting the opinions of minority shareholders and other stakeholders in the board of directors. The 2021 revision requires Prime market listed companies to have at least two independent outside directors, constituting at least one-third of the board.

He said, "The Tokyo Stock Exchange applies a 'Comply or Explain' approach regarding the CG Code. If a company does not appoint outside directors, it must provide an explanation. However, since it is often difficult to justify this in practice, the majority of listed companies and financial institutions comply."

Professor Kawaguchi also explained the conditions for outside director independence as presented by the Tokyo Stock Exchange through the CG Code. He stated, "In Japan, if an outside director has elements of conflict of interest with general shareholders, is significantly influenced by management, or can significantly influence management, they do not meet the criteria for independent officers. For example, an executive of a parent financial holding company cannot be appointed as an independent officer of its subsidiary bank, and a bank cannot be considered sufficiently independent if it has significant influence over a major borrower."

The operation methods of the independent outside director systems of Japan's three major financial holding companies?Mitsui Sumitomo, Mizuho, and Mitsubishi UFJ Financial Group?were also introduced. Mitsui Sumitomo had 7 outside directors (46.6%) out of 15 board members, Mizuho had 6 out of 12 (50%), and Mitsubishi UFG had 9 out of 16 (56.5%), with the proportion of outside directors reaching about 60%. Furthermore, regarding the composition of nomination, remuneration, and audit committees under the board, all three holding companies had a high proportion of outside directors.

This aspect is similar to domestic financial holding companies. Professor Kawaguchi said, "All three major holding companies include inside directors on their audit committees. This is partly because outside directors need to obtain necessary information from inside directors, but it is also presumed that the company wants to monitor the progress of audits."

Meanwhile, like Korea, Japan also faces challenges in building board diversity and securing a talent pool. The talent pool is narrow, consisting mainly of men, bureaucrats, legal professionals, and professors, and some experts serve as outside directors for multiple companies simultaneously, which is a problem to be addressed. Professor Kawaguchi noted, "For example, in Japan, the proportion of female executives is overwhelmingly low globally, making it difficult to find candidates. The issue with Japan's outside director system is shifting from simply meeting numerical targets to finding high-quality talent."

This content was produced with the assistance of AI translation services.