Group 3 section b


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Group 3 section b

  1. 1. Current Standard of Corporate Governance in JapanSubmitted by-Group 3:Advait BhobeChandrashekhar JindalKanumuri RajshekharRaunak VasandaniSangram Korekar1
  2. 2. Introduction -Corporate Governance is "the system by which companies are directed and controlled".] Itinvolves regulatory and market mechanisms, and the roles and relationships between acompany’s management, its board, its shareholders and other stakeholders and the goalsfor which the corporation is governed. In contemporary business corporations, the mainexternal stakeholder groups are shareholders, debt holders, trade creditors, suppliers,customers and communities affected by the corporations activities. Internal stakeholdersare the board of directors, executives and other employees.The word for Corporate Governance in Japan is called as zaibatsu. The corporategovernance of Japan dates back to the 19th century, much of which was propelled by theformation of the Meiji Restoration in 1866 by the Japanese government, the same timewhen the world entered the Industrial Revolution. These formations weretermed zaibatsu. Prior to the war, Japan remained dominated by four major zaibatsu: Mitsubishi, Sumitomo, Yasuda and Mitsui. They focused on steel, banking, internationaltrading and various other key sectors in the economy, all of which was controlled bya holding company. Apart from this, they remained in close connection to influential banksthat provided funding to their various projects.The prototypical keiretsu appeared in Japan during the "economic miracle" following WorldWar II. Before Japans surrender, Japanese industry was controlled by large family-controlled vertical monopolies called zaibatsu. Under this system, large industrialcorporations paved the way for banks and trading companies to sit on top of theorganizational pyramid controlling all financial operations and distribution of goods.A recent wave of corporate scandals sweeping Japan has again highlighted poor governancestandards there. For long-time Japan watchers, the sense of "déjà vu all over again" is trulydisturbing. Why is it that Japan hasnt been able to fix rules that have been broken for solong?Consider the recent lapses. Most notably at Olympus, the chairman who resigned last weekallegedly engineered deals in which the company, for reasons as yet unknown, grosslyoverpaid in a series of mysteriously connected M&A transactions, and then fired theforeign-born chief executive when he tried to bring accountability to bear.Daio Paper is suing its former chairman for allegedly "borrowing" $140 million fromsubsidiaries without permission, which is a classic hand-in-the-cookie-jar scandal in a2
  3. 3. Japanese founder-family led company. The board was not even asked to approve the 26-odd loans that were made.Tokyo Electric Power Co., or Tepco, which is in the midst of receiving a bailout after boardoversight and risk management lapses contributed to a dangerous and costly disaster at theFukushima Daiichi nuclear plant. Kyushu Electric is embroiled in a political influence scandalin which managers allegedly endangered the firms reputation by trying to trump up theappearance of support for the companys desire to restart its nuclear power plants after agovernment-imposed shutdown.The basic elements of these scandals are all too familiar: a toxic mix of lack of transparency,accountability, and independence on boards. Japan has been down this road many, manytimes before. Why has nothing changed?The problem is that Japan has never seriously attempted a major overhaul of its corporategovernance system for all listed companies. Structural gaps in the Company Law leaveJapan Inc. without essential legal infrastructure and principles that are already in placeelsewhere. This is exacerbated by a lack of training for board members and executivesabout how to enforce the existing standards that do exist.Tokyo has spent the past 20 months considering changes to the Company Law "to improvegovernance." However, the proposals so far drafted by the Ministry of Justices advisorycommittee fall far short of achieving this goal. What is missing?First and foremost, the Company Law needs for the first time to include a definition androle of "independent outside director," and do so in a way that will enable outside voiceson boards to be effective. Currently there is no legal definition of "independent director."There is only "outside director," a term interpreted simply to mean anyone who has neverworked for the company. That narrow concept doesnt capture many people who might betoo close to management to be truly independent.Second, the Company Law needs to strengthen the role of independent directors byrequiring a minimum number. It should also require committees of independent directorsto take charge of clearly defined matters, such as self-dealing transactions, investigations orpricing of management buy-out deals, where the chance of management self-dealing ishigh.Such fairly simple reforms could have averted some of the recent scandals, or at leasthastened their exposure and accelerated the recovery of corporate credibility so as to cutdown on damaging uncertainty for investors.3
  4. 4. At Olympus, under the current law there was no legal mechanism for the board to handlethe allegations of impropriety that former chief executive Michael Woodford raised whenhe first disclosed the chairmans suspect dealings. Under corporate law in most places,independent directors already sitting on the board would have immediately formed aspecial committee that was legally authorized to investigate. It would have been harder forthe chairmans personal irritation to push Mr. Woodford out of the company.Instead, the company thrashed around for three weeks forming a "third-party committee"comprising persons, however reputable, with no legal duties, liabilities or investigationrights. This is because they are not board members.When executives know that they can be immediately investigated and fired by neutraloutsider committees for gross incompetence, malfeasance and lack of transparency, slackcompany habits no longer pass muster and fewer scandals occur. If this sort of protectionhad existed in Japanese law already, it is unlikely that some of the recent problems wouldhave occurred at all, or in the value-destroying way they did.In part, this would be due to the diligence and ethics of Japanese employees. Internalwhistleblowers at Olympus and Daio (and possibly, Tepco) would have probably giveninformation to committees of independent directors earlier, and these committees, whichwould have had teeth, could have acted earlier. Similarly, Kyushu Electric would not havebeen able to excise the portions of the report by its "third-party committee" that it foundinconvenient.Improving governance will not simply be a matter of changing the law, however. Japan Incand Japan more broadly, needs an update in thinking on governance issues.Part of the problem is political. Although the current Democratic Party of Japan governmentis less business-friendly than the long-ruling Liberal Democratic Party before it, policymakers and the media still buy into a reflexive attitude that whats good for Japaneseexecutives is good for their companies, and whats good for companies is good for Japan.Policy makers need to be much less deferential to corporations on governance issues. Inthis respect, the DPJ needs to push the Justice Ministry to move forward with meaningfulgovernance reforms despite industry reluctance.In tandem with that, citizens need to understand that governance failures are not a matterof one bad company here and there, but rather arise from structural and systemicweaknesses. Domestic investors in particular should demand better governance instead ofassuming that "what Japanese managers want is probably right."4
  5. 5. Investors have lost $46 billion on Olympus, Daio, Kyushu Electric and Tepco combined thisyear, not to mention other scandals over the years. Bad corporate governance is a costlymistake Japan can ill afford, and a growing embarrassment for a country that deserves farbetter.How does Japans situation differ from other economies?According to the Tokyo-based Japan Association of Corporate Directors, whose aim is toimprove corporate governance, only 35 percent of the companies listed on the first sectionof the Tokyo Stock Exchange have outside directors, with 1.8 for any given firm.Outside directors are supposed to represent shareholders interests, not the companys.But the legal system does not guarantee that because the Company Law does not prohibit acompany from hiring an "outside" director who worked for the parent company or itsaffiliates.There are considerably fewer outside directors in Japan than at corporations in otherdeveloped countries. The United States, France and Australia, for example, require thatoutside directors at listed companies make up more than half of their entire boards.Takeyuki Ishida, vice president of Institutional Shareholder Services K.K., a U.S.-basedcorporate governance solution provider, said when he goes abroad and tells foreignersabout the lack of outside directors in Japanese companies, "our conversation stops for amoment" because they are shocked."Its like people who are taking exams are grading the exams by themselves," he said.Japan’s legal reform undertaken during the 1990s and on is massive and covers many areas.The legal reforms that affect business activities include: reforms in the legal andinstitutionalPractices in the areas of banking, corporate governance, capital markets and financialInstruments and anti-monopoly (anti-trust) laws.A significant number of new regulations and laws in corporate governance have beenProposed and implemented throughout the 1990s and the early 2000s. Many of theseChanges will have a major impact on the corporate governance practices of many JapaneseFirms. For this reason it is noteworthy that these changes in the legal settings of Japanese5
  6. 6. Corporate governance took place so promptly.It is generally agreed that the reason for this prompt acceptance of the major proposedChanges in corporate governance practices is that the problems with the post-secondWorldWar (WWII) bank-based corporate governance mechanisms prevailing in Japan until theEarly 1990s were among the major causes of demise of many Japanese corporations.Policy issuesJapan’s post-WWII bank-based corporate governance system was thought to be broadlyConsistent and in equilibrium with:(I)Japanese societal norms;(ii) Long-term management practices including employment and industrialRelations practices;(iii) Long-term practices in industrial organization;(iv) Anti-trust (anti-monopoly) law and related practices; and(v) Other legal and institutional practices including government practices.(1)Will Japan’s new corporate governance system, after selective adaptation, be?Compatible with (i)-(v) above, which themselves will be evolving over time?Potential inconsistencies / dysfunctionality, if any, might lead to the loss in economicEfficiency.(2)On the other hand, successful adaptation may lead to efficiency gains.How much degrees of freedom do Japanese firms have in designing their new corporateGovernance system under the revised legal regime?Improvement in Japan’s Corporate Governance-6
  7. 7. In 2008 Olympus bought Gyrus, a British company, for the equivalent of US$2.2 billion. Inconnection with this transaction, it paid an advisory fee of US$687 million to a firmincorporated in the Cayman Islands and another in New York — this advisory fee was morethan 30 percent of the purchase price rather than the usual advisory fee of about 1 percent.This was red flag no. 1. The ultimate owners of these advisory firms are still unknown — amore alarming red flag no. 2. Michael Woodford, a British national and 30-year veteran ofthe company, was fired as Olympus CEO on 14 October after he began investigating aboutUS$1.3 billion in acquisition write-downs and the aforementioned advisory fees related totakeovers that neither he nor a forensic accounting firm he hired could explain. Screamingred flag no. 3.According to reports, the Olympus board voted unanimously at a 10-minute meeting tojettison Mr. Woodford, citing “difference of management style.”Mr. Woodford, in turn, challenged Olympus Chairman and President Tsuyoshi Kikukawa andother executives to explain the transactions. He also made public aPricewaterhouseCoopers report he commissioned that said the company may faceregulatory and legal scrutiny because of the payments made in the acquisition of U.K.-based Gyrus.Continuing Controversy-Things have begun to develop quickly, as just last week Olympus shares surged followingthe resignation of Kikukawa amid the growing scandal. Kikukawa’s resignation did notaddress the payment of fees of more than US$720 million of write-downs within 12 monthsof making three other acquisitions.Japanese, British, and American authorities are now investigating these acquisitions, too.The company has established a committee to examine the deals in question. Because thiscommittee will be made up of directors who joined the board after the deals in question,some investors are questioning the independence of these committee members, as theyhave been appointed by Olympus to investigate Olympus.Corporate governance continues to be a challenge in Japan. According to the corporategovernance rating firm GMI, the country ranks at the low end of league tables ingovernance, behind regional rivals Hong Kong, Singapore, and China. Currently in Japan,there is no requirement for independent directors on boards, and many corporate boards7
  8. 8. are filled with company insiders. Governance and compensation committees are a novelty,and nearly all annual meetings are held during the same week in June, making it nearlyimpossible for interested investors to constructively dialogue with managers and boards.Positive Developments for the Future-There is, however, reason to believe that things may be improving. The Financial ServicesAgency (FSA) in Japan has been discussing ways to improve corporate governance in orderto make the country more attractive to outside investment. Similarly, the Tokyo StockExchange has also put governance reforms on the agenda. Finally, there are efforts alreadyunderway by a select group in the Japanese House of Councillors, in conjunction with theJapanese Independent Directors Network, to improve the situation, though they admit itwill be several years before any changes are apparent.With regards to Olympus, a senior executive of the Tokyo Stock Exchange recently sent astrong signal when he suggested the possibility of a delisting if it was found that thecompany had seriously falsified information. Also, according to recent reports, some ofOlympus’s largest shareholders, including Nippon Life, which holds 8 percent of Olympus’shares, have demanded more disclosure.Kabushiki Gaisha –Kabushiki Gaisha is a type Business Corporation under Japanese Law.Formation-A Kabushiki Gaisha was started with capital as low as ¥1, making the total cost of a K.K.incorporation approximately ¥240,000 (about US$2,500) in taxes and notarization fees.Under the old Commercial Code, a K.K. required starting capital of ¥10 million (aboutUS$105,000); a lower capital requirement was later instituted, but corporations with under¥3 million in assets were barred from issuing dividends and companies were required toincrease their capital to ¥10 million within five years of formation.8
  9. 9. The main steps in incorporation are the following:Preparation and notarization of article of associations-Receipt of either directly or through an offeringsThe incorporation of a K.K. is carried out by one or more incorporators, sometimes referredto as "promoters"). Although seven incorporators were required as recently as the 1980s, aK.K. now only needs one incorporator, which may be an individual or a corporation. If thereare multiple incorporators, they must sign a partnership agreement before incorporatingthe company.Board of Directors-Under present law, a K.K. must have a board of directors consisting of at least threeindividuals. Directors have a statutory term of office of two years, and auditors have a termof four years. Close companies can exist with only one director, with no statutory term ofoffice.At least one director is designated as a representative director, holds the corporate sealand is empowered to represent the company in transactions. The representative directormust "report" to the board of directors every three months; the exact meaning of thisstatutory provision is unclear, but some legal scholars interpret it to mean that the boardmust meet every three months. At least one director and one representative director mustbe a resident of Japan.Directors are agents of the shareholders, and the representative director is a mandatory ofthe board. Any action outside of these mandates is considered a breach of mandatory duty.Auditing & Reporting-Every K.K. with multiple directors must have at least one statutory auditor. Statutoryauditor report to the shareholders, and are empowered to demand financial andoperational reports from the directors.K.K.s with capital of over ¥500m, liabilities of over ¥2bn and/or publicly traded securitiesare required to have three statutory auditors, and must also have an annual auditperformed by an outside CPA. Public K.K.s must also file securities law reports with theMinistry of Finance.9
  10. 10. Under the new Company Law, public and other non-close K.K.s may either have a statutoryauditor, or a nominating committee, auditing committee and compensation committeestructure similar to that of American public corporations.Close K.K.s may also have a single person serving as director and statutory auditor,regardless of capital or liabilities.A statutory auditor may be any person who is not an employee or director of the company.In practice, the position is often filled by a very senior employee close to retirement, or byan outside attorney or accountant.Officers–Japanese law does not designate any corporate officer positions. Most Japanese-ownedkabushiki Gaisha do not have "officers" per se, but are directly managed by the directors,one of whom generally has the title of president. The Japanese equivalent of acorporate vice president is a department chief. Traditionally, under the lifetimeemployment system, directors and department chiefs begin their careers as line employeesof the company and work their way up the management hierarchy over time. This is not thecase in most foreign-owned companies in Japan, and some native companies have alsoabandoned this system in recent years in favour of encouraging more lateral movement inmanagement.Corporate officers often have the legal title of shihainin, which makes them authorizedrepresentatives of the corporation at a particular place of business, in addition to acommon-use title.Rules of Board of Directors-Objectives- The rules provide for the matter relating to Board of Directors.Convocation- the Board meeting should be convened by Chair of Board. Notices regardingboard meeting has to be convened 3 days prior to the meeting stating the date, timing &agenda of the meeting to each & every member of the meeting.Holdings of the meetings- Board meetings shall be conducted once within 3 months. Thedirector should not exercise voting rights.Attendance by the people concern- The Corporate officers should attend the meetings &express their views & concerns.10
  11. 11. Minutes- The minutes should be made after every meeting & summary of the meetingsshould be written accordingly.3) Corporate Governance of Yamaha – Yamaha has six directors, including three outside directors. In order to accelerate decision-making by the Board of Directors and enhance supervisory functions. Outside directors alsoact as members of the Corporate Governance Committees and serve to ensuretransparency of management decision-making. In principle, the Board convenes oncemonthly, and is responsible for the Groups management functions. This includes proposingGroup strategy while monitoring and directing the execution of business carried out byeach division. In order to clarify responsibilities, directors are appointed for a term of oneyear. Yamaha also employs an executive officer system with the aim of strengtheningconsolidated Group management and the business execution functions of divisions. As ofJune 28, 2012, the executive officer system comprises 15 executive officers, including twomanaging executive officers, who are assigned to business or administrative divisionsdealing with important management issues. The executive officers support the President,the chief officer in charge of business execution. Managing executive officers, who serveconcurrently as Company directors, are assigned to oversee the operation of businessesand administrative divisions, in accordance with the importance of these responsibilities. Inaddition, five senior executive officers oversee the entire Company organization. As groupmanagers, they are responsible for the performance of key divisions within the Company,and manage and direct in a manner appropriate for bringing the functions of each group tothe fore.Audit system of Yamaha-Yamaha is a company with a Board of Auditors as defined under Japanese law, and hasworked to enhance governance functions by introducing an executive officer system, aswell as by setting up Corporate Governance Committees and an internal control system.These actions in conjunction with consistent audits of the Companys daily operationsconducted by Yamahas system of full-time auditors raise the effective of governance. As of June 28, 2012, Yamaha has four auditors, including two outside auditors. In principle,the Board of Auditors convenes once monthly. Based on audit plans, auditors periodically11
  12. 12. perform comprehensive audits of all divisions and Group companies, and participate inBoard of Directors meetings and other important meetings such as management councils.Yamaha has also established a Corporate Auditors Office (with one staff member as of June24, 2011) dedicated to supporting auditors. This system helps ensure an environmentconducive for performing effective audits.With respect to accounting audits, the suitability of such audits is determined based onperiodic progress reports from the accounting auditors of their audits of the Companysfinancial statements. The Internal Auditing Division (10 staff members as of June 28, 2012)is under the direct control of the President and Representative Director. Its role is to closelyexamine and evaluate systems pertaining to management and operations, as well asoperational execution, for all management activities undertaken by the Company andGroup companies from the perspective of legal compliance and rationality. Evaluationresults are then used to provide information for the formulation of suggestions andproposals for rationalization and improvement. In parallel, Yamaha strives to boost auditefficiency by encouraging close contact and coordination among corporate auditors andaccounting auditor12
  13. 13. References-