While Japanese companies are making huge progress in terms of corporate governance — particularly in relation to board independence and diversity — money management executives say that caution is necessary.
Recent revisions to the country's corporate governance and stewardship codes are pushing Japanese companies and operating standards further in line with best practices around the world. Appointing women to company boards and adding independent directors are among such enhancements.
But executives focusing on Japan warn there is a danger of tokenism and "overboarding" — with directors sitting on too many company boards — as firms rush to comply with the standards put in place by Japan's Financial Services Agency and the Tokyo Stock Exchange under the revised codes.
The problem is exacerbated by more stringent requirements for corporations looking to make it into the Tokyo Stock Exchange's prime listings section, requiring at least one-third independence on the board and in some cases a majority of independent directors.
The proportion of independent directors on Japanese corporate boards is already on the rise — sources said they accounted for 36% of boards in 2020, up from 27% in 2019.
But struggles remain. "For a market that has historically had quite some challenges filling these roles — and I've spoken to a lot of management teams over the years who say they are looking and have not found the right person — we now are going to see more of these issues and we are concerned about that," said Kei Okamura, Tokyo-based director of Japan investment stewardship at Neuberger Berman Group LLC. "We're concerned companies might take a mechanical approach" and appoint directors without the necessary experience. "If those people get picked, what you essentially have is a board of yes men and women," he said. Neuberger Berman has $402 billion in assets under management.