Prof. Souichirou Kozuka

Corporate governance as fashion? Japan’s efforts to change the ‘insiders’ community’

Japan has recently made significant efforts in improving the corporate governance. The result was the amendments to the Companies Act in 2014 and the introduction of the Corporate Governance Code the next year. The two instruments, in force since June 2015, have adopted the ‘comply or explain’ approach with regards to the requirement of minimum number of outside or independent directors in the board. The rate of compliance (rather than choosing ‘explain’ for not complying) has proven to be very high. Thus, apparently the corporate governance reform has been in fashion in Japan.

The Corporate Governance Code also requires diversity within the company, and provides that the board should be composed so as to ‘balance the diversity and proper size.’ The reference to diversity sounds curious, given that the motivation of the reform was to enhance the performance of Japanese companies and that the correlation between the performance and diversity of companies have not been confirmed. A possible explanation is that the reform aims to change the corporate culture of Japanese companies as an ‘insiders’ community’, which typically means the community consisting of like-minded people with similar (social and educational) backgrounds, mostly male, with their entire career having been devoted to the same company. This paper examines the board composition, in particular, the backgrounds of appointed independent directors and the degree of diversity within the board, of certain listed companies in Japan and considers whether Japan’s reform of corporate governance is a mere fashion or serious efforts to change the corporate culture.