Chapter 1
Purpose of a Business Corporation
The purpose of a corporation in Japan differs from that in the West. While the latter is aimed primarily to provide profits for shareholders, Japanese corporations exist fundamentally to produce economic value to Japan as a nation. Creation of employment to the Japanese people is the highest priority of the Japanese corporations. Given this difference in corporate purpose, Western i.e., Anglo-American notions of corporate governance have limited applicability in Japan. While the West emphasizes the relationship between shareholders, management, and the Board of Directors, Japanese corporations are dedicated to their stakeholders, i.e., the employees, customers, suppliers, creditors, and community.
However, Japanese corporations may be following the much older style of American corporate governance. It was only in the 1960s and 1970s that the voice of shareholders started to gain prominence in corporate governance in the United States. Most U.S. boards 30 or 40 years ago looked rather similar to what Japanese boards look like now in terms of independent outside directors. There are diversities of corporate governance practices among U.S. companies. Some adhere to practices that are radical by Japanese standards (e.g., IBM Corp. and Dell Computer Corp., whose boards comprise all outside members except for one), whereas some do not look too dissimilar to the typical Japanese pattern. Similarly, there are diversities of corporate governance practices among Japanese companies. Most progressive Japanese companies may be more open than the most conservative U.S. companies. It is expected that there will be a certain amount of convergence of Japanese corporate governance practices to the U.S. model as globalization proceeds and international accounting standards are being adopted in Japanese companies increasingly. However, given the deeply rooted differences in the role, behaviour, and function of corporations in the two countries, it may take decades, before corporate governance in Japan converges to that in the United States.
Chapter 2
Traditional Practices of Corporate Governance in Japan
The corporate governance of Japanese companies is often described as âContingent Governanceâ or âEmergency Governanceâ. This implies that the management are quite free in their day-to-day operations, but in a crisis situation, the main banks take over the management. This structure is supported by three major features (Yasui, 1999). These are as follows:
(1) homogeneous and hierarchical Board of Directors;
(2) silent shareholders;
(3) monitoring by banks.
Homogeneous and Hierarchical Board of Directors
The boards are composed of homogenous members of similar nationality and have a hierarchical structure. These boards have some similarity with the boards in US companies, but there are significant differences. In the USA, directors are appointed from outside in most cases. There is also diversity of national and cultural origin. In Japan, most of the members are inside men. They have many years of experience of working within the same organization.
This has serious effects on the management of the company. In the USA, the boards appoint CEOs and other senior officers. In Japanese companies, the board members are responsible for most important management decision-making. In the Japanese framework, the supervisory function of the board is supported by the corporate auditors. According to âThe Commercial Codeâ of Japan, the corporate auditors, who also supervise corporate affairs, are appointed by shareholders. However, in practice, they only check the legality of the affairs of the management. Also, most corporate auditors are ex-employees of the same company or from partner companies.
Silent Shareholders
In most Japanese companies, a significant portion of shares is held by important banks, insurance companies and members of the same Keiretsu group. The prevailing culture is the cross-shareholding by other Japanese companies. Thus, there is no such thing like hostile take over. Shareholders do not interfere in the management of the company to maintain harmony, which is the guiding principle of the Japanese corporate affair.
Monitoring by Banks
Japanese firms depend significantly on banks for the financing of daily working costs and investment, and banks are in a position to control them. It is common in Japan that one of these banks, which maintain financial relationship, acts as the âmain bankâ.
The main bank is the largest creditor for the company and the principal supplier of various financial services and provides management of bond issues. When the company is in distress, the bank would take over the management.
The Role of Employees
Although as in some European countries, the employeesâ involvement in the corporate governance process in Japan is not legally guaranteed, their influence is often very significant. Satisfaction of the employeesâ interest is one of the important measures of corporate performance. This is associated with lifetime employment. The management has to pay proper attention to motivate them to contribute the maximum to the company.
Recent Changes
Japanese firms have recently become less dependent on banks. Japanese corporations can now to raise their required funds from the stock markets. It is no longer a very profitable business for banks to act as the main bank.
The attitude of the shareholders have changed. Foreign investors demand more active participations as the shareholding by domestic corporations has been diminishing significantly. The members of the boards are required to provide better corporate governance, as otherwise they would be responsible for enormous financial liability.
The corporate accounting standards and disclosure requirements are being significantly reformed so as to conform to the requirement of the international stock markets where the Japanese companies are listed.
As a result, the composition of the board is changing as well. Now, many companies try to reduce the number of the members of the boards to turn them as an important decision-making body. Also, a number of companies introduced the executive officer system, separating the board and the management of the company. The function of statutory auditors, legally responsible for supervision over management on behalf of the shareholders, is now increasingly important. The American system of appointments of independent outside directors is introduced in Japanese companies.
Chapter 3
Corporate Governance System in Honda and Sony
In describing the corporate governance system in Japan, we focus mainly on two companies from two sectors, automobiles and consumersâ electronics, Honda and Sony.
Honda Philosophy
The corporate philosophy of Honda as given in their website (http://world.honda.com/profile/philosophy) is as follows:
âMaintaining a global viewpoint, we are dedicated to supplying products of the highest quality at a reasonable price for worldwide customer satisfaction. To meet the particular needs of customers in different regions around the world, we base our sales networks, research & development centers, and manufacturing facilities in each region. Furthermore, as a socially responsible corporate citizen, we strive to address important environmental and safety issues.â
Based on this corporate philosophy, the company is enhancing corporate governance as the important part of its management system.
âOur aim is to have our customers and society, as well as our shareholders and investors, place even greater trust in us and to ensure that Honda is a company that society wants to exist.â
External directors and corporate auditors are appointed to the Board of Directors and the Board of Corporate Auditors. They are responsible for the supervision and auditing of the company. Honda also has an operating officer system. Operating officers are under the Board of Directors. Each director is appointed for one year, and their compensation depends on the performance of the company.
Each region has its own headquarters, with a general manager who is also a member of the Board of Directors is in charge. Then there are the management councils and regional operating councils responsible for the management of their respective areas. Each division of the company is responsible for legal and ethical compliance and risk management. Hondaâs basic policy is to have the appropriate disclosure of company information, financial results on a quarterly basis, and announcement of management strategies.
State of the Companyâs Management Structure
Management Organization
Board of Directors
The Board of Directors consists of 20 directors, including two outside directors.
The company has appointed outside directors to receive advice on its corporate activities. The Board of Directors also provides information on items of business and topics as necessary to outside directors.
Board of Corporate Auditors
The Board of Corporate Auditors consists of six corporate auditors, including three outside corporate auditors. They attain meetings of the Board of Directors and inspect companyâs assets and liabilities. The corporate auditors work in collaboration with the audit office, which is responsible for the internal audits. The Board of Directors also provides items of business and other information as necessary to the outside corporate auditors (http://www.honda.co.jp/investors/ in Japanese; http://world.honda.com/investors/).
Accounting Audits
Auditing reports are based on the Commercial Codeâs Audit Special Exceptions Law (Company Law from fiscal 2007), the Securities and Exchange Law, and the U.S. Securities Exchange Act. They also supervise the independent auditors. Each contracts of the company must have prior consent from the Board of Corporate Auditors.
Business Execution System
Organization
The company has six regional operations around the world. The company has four major business operations, motorcycles, automobiles, power products, and spare parts. Each functional area â such as Customer Service Operations, Production Operations, Purchasing Operations, Business Management Operations, and Business Support Operations â supports the other functional areas. Honda R&D Co. Ltd., is for research and development on products, while Honda Engineering Co. Ltd., is for research and development for the production technology.
Management Council
There is the management council, which consists of 10 representative directors. This management council considers important management issues in collaboration with the Board of Directors.
Regional Operating Councils
Regional operating councils are there at each regional operation to discuss important management issues in the region.
Status of Measures Related to Shareholders and Others with Vested Interests
The company sends convocation notices before the date required by law, and also allows shareholders to exercise their voting rights via the Internet, using personal computers or mobile phones. Convocation notices are sent in English to overseas investors. In these and other ways, the company strives to make the exercise of rights as smooth as possible.
For analysts and institutional investors, the company holds meetings to present its results four times a year and meetings with the president twice a year. Company representatives visit and hold information meetings as needed for major Japanese and overseas institutional investors to explain the Honda Groupâs future business strategies. Representatives based in North America and Europe also hold information meetings for institutional investors as appropriate. Moreover, the company conducts regular tours of facilities in Japan and overseas for shareholders and other investors (http://www.honda.co.jp/investors/ in Japanese; http://world.honda.com/investors).
Respecting the Perspective of Stakeholders
Honda Group has a set of behavioural guidelines, which individual employees should observe. Honda pursues environmental protection activiti...