The Battle for Corporate Control in Japan & Independent Directors

1. The Battle for Corporate Control in Japan & Independent Directors Dept Business Law & Taxation Staff Seminars Presenter: Matt Nichol

2. Will the introduction of independent directors have a significant impact on Japanese corporate governance? introduction of outsider control & independent monitoring and the ‘insider’ Japanese firm

3. Creation of Widely Held Firm • HCLC break-up - ownership in 1949: • individuals owned 69.1% • rest local/national govt, financial institutions & corps • Increase in shareholders • 1945 1.7 million • 1950 4.2 million • Impact on job security?

4. Short Life of Widely Held Firm • Role of presidents of former zaibatsu companies • Insider features of keiretsu: • cross shareholdings • main bank • lifetime or long-term employment • Yoshiro Miwa & Mark Ramseyer: fable of the keiretsu

5. Collapse of Foundation for Keiretsu • Relationship underpinning keiretsu collapses: • banks burdened by bad loans in 1980s • main banks withdrew support for management • management sell cross shareholdings to free cash • lifetime employment threatened • Economic problems - political climate - law reform

6. Insider Nature of Japanese Firms • Corporate values & employees • Directorship was an internal promotion • Large boards • Toyota: 64 - 2003 to 36 - 2008 • Nippon Steel: 52 - 1988 to 18 - 2008

7. The Heisei Renewal • Key corporate law reforms • 1990-2005 Reforms focused on new corporate entities, shares, share transfers & reconstructing the financial system • 2002 Introduction of US style corporate governance - ‘company with committees’ • 2005 Consolidation of commercial laws into new Corporations Law

8. Company with Committee • Adoption of Committee by large corporations - is optional to existing statutory auditor system • 3 committees for audit, nomination and remuneration • Minimum 3 directors and majority of ‘outside’ directors

9. Is an Outside Director an Outsider? • Article 2(15) Company Law: An outside director is a director who is not presently and never has previously been an executive director, an officer or an employee of the company or a subsidiary of the company. • Does this provision support or even encourage insider governance?

10. Independent Directors • Rule 436-2 TSE Securities Listing Regulations For the protection of general investors an issuer of listed domestic stocks must secure at least oneindependent director or auditor (outside director or auditor under Company Law) who is unlikely to have conflicts of interest with general investors.

11. Who is an Independent Director? • Rule 5(3)-2 TSE Guidelines Concerning Listed Company Compliance Independent director/auditor must not be a person who: • executes business of parent company or subsidiary of the company; • is a major client or person who executes business for such a company; • is a consultant, accounting professional or legal professional who receives a large amount of money or asset other than remuneration for directorship/auditorship of the company; • is a person who was recently a-c; • is a close relative of anyone in a-c (covers d).

12. Significance of TSE Rules • Independent director/auditor - long history of large Japanese firm • Completion of corporate law reform agenda?

13. Effectiveness of Independent Directors • Effectiveness? Introduced 31 December 2009 • Japanese - formal rules vs. normative behaviour • Possible role of foreigners? • Minimum of one director • Appointment