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Jun 21, 2015

Japan sees surge in companies appointing outside directors

ISS to recommend votes against executives of companies with fewer than two outside directors

The prevalence of outside directors on boards of Japanese companies has increased sharply since the introduction of a corporate governance code for public companies, which came into effect on June 1. Legal changes that require all-insider boards to explain why they won’t appoint outside directors have also boosted numbers, says proxy advisory firm ISS.

Ninety-four percent of publicly traded companies in Japan currently have at least one outside director sitting on their board, up from 72 percent in December, according to an ISS study of 2,500 companies. The number of companies with two or more outside directors – the proportion suggested by Japan’s new corporate governance code – has jumped to 55 percent from 31 percent.

ISS, which changed its benchmark voting policy in February 2013 to recommend votes against top executives at Japanese companies where the board does not include at least one outside director, says it will soon change its policy again – to recommend voting against top executives if the board doesn’t have multiple outside directors.

The firm says it will give companies until February 2016 to recruit qualified candidates for outside directorships before the change in voting recommendations takes place.

‘The rapid increase in the number of companies with outside directors will come as a surprise to many market observers,’ says Martha Carter, managing director and head of global research and policy at ISS, in a press release. ‘While it’s clear recent governance reforms are making their mark on corporate Japan, it remains to be seen how global investors will evaluate the role and gauge the efficacy of these new voices in the boardroom.’

ISS says it also detects a switch in Japan away from a two-tiered structure that includes statutory auditors and toward a one-tiered board structure, noting that it has found 177 companies that have switched to the latter. This brings the proportion of companies that have either adopted the one-tier structure with an audit committee or moved to a three-committee system like in the US to 7 percent, up from 2 percent a year ago.