Spike Reflects Impact of Corporate Governance Reforms
Rockville, MD (June 17, 2015) – Institutional Shareholder Services Inc. (ISS), a leading provider of corporate governance solutions to the global financial community, today announced findings from an analysis of Japanese corporate filings for the 2015 annual meeting season, which show marked growth in the prevalence of outside directors.
In advance of Japan’s peak annual meeting date of June 26, ISS data show more than 94 percent of companies have at least one outside director sitting on the board, compared with just 72 percent as recently as December. Moreover, ISS is tracking a similar spike in the number of companies with at least two outside directors, which has jumped nearly 24 percentage points to 55 percent during the same period. The figures are based on an analysis of more than 2,500 companies covered by ISS since January 1.
“The rapid increase in the number of companies with outside directors will come as a surprise to many market observers, with the recently concluded March annual meeting ‘mini’ season suggesting far fewer companies would move away from insider-only boards so quickly,” said Martha Carter, managing director and head of global research & policy at Institutional Shareholder Services. “While it’s clear that 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.”
Recent amendments to Japanese Corporate Law require companies with all-insider boards to publicly disclose why they believe the appointment of outside directors is inappropriate. Concurrently, the introduction in December of a corporate governance code for the market’s corporations suggested the appointment of two independent directors as a minimum requirement for market best practice. The corporate law amendments took effect in May and code guidance took effect this month.
In consultation with its institutional investor clients, corporations, and other governance stakeholders, ISS modified its benchmark voting policy in February 2013 to recommend votes against top executives at a company if the board does not include at least one outside director. Beginning in February 2016, and following a one-year grace period to allow for the recruitment of qualified outside director candidates with suitable skills and backgrounds, ISS will recommend votes against top executives where the board does not include multiple outsiders. More on ISS’ benchmark proxy voting policy for Japan is available here.
Another boardroom reform, albeit slower moving, is also now evident when ISS examined the number of companies that have moved to a one-tiered board structure and away from a two-tiered approach that includes statutory auditors. Since March, ISS has tracked 177 companies that have adopted the new one-tiered structure with an audit committee, an approach allowed for as part of the recent Corporate Law amendments. The shift brings to roughly 7 percent the proportion of Japanese companies doing away with statutory auditors and adopting either a one-tiered board structure with an audit committee or opting for a U.S. style, three-committee system. The figure represents a 5 percentage point jump compared with last year.
“With the pending phase out of all-insider boards, global investors will likely shift their focus to the need for additional outside directors, as well as director qualifications, at portfolio companies,” said Carter.