Russell Reynolds Associates: Japanese companies respond to the new Corporate Governance Code

The introduction of Japan’s Corporate Governance Code in late 2015 required Japanese companies to formally evaluate their boards for the first time. Yet many Japanese companies seemed unprepared to contemplate what an “ideal” board might be – making it difficult to evaluate their own organization. In addition, the culture of constructive feedback has not yet taken root in Japan as it has in some other parts of the world, such as the US and the UK, where the great majority of businesses perform routine board evaluations. Perhaps not surprisingly, therefore, there has been some reluctance by Japanese companies to review and rate their board’s performance and composition.

 

Nonetheless, many companies submitted a limited questionnaire to their boards, while some brought in third parties to perform external evaluations. These companies appear to have derived great value from the process, uncovering a number of challenges facing their boards for the first time. These challenges included a need for more substantive strategy discussions, greater board diversity, more involvement in succession planning and increased information sharing with outside directors.

 

In other parts of the world, such as the US and the UK, investor demands for stricter and more detailed board evaluations are growing – and in particular for objective, external evaluations every few years. As a result, we believe such evaluations will eventually become the norm in Japan. The sooner that Japanese companies understand and accept the evaluation process, therefore, the better positioned they will be to meet investor demands going forward.

 

While there is still some confusion around the evaluation process, of course, these are early days. Companies are just beginning to understand that board evaluations are primarily for internal use – to improve governance – and that the more strictly they evaluate themselves, the better. In addition, boards must use the evaluation process to discover the kind of board they really want and the opportunities they wish to seek. Finally, given that boards themselves will evolve continuously due to market, regulatory and other shifts, regular and consistent reviews of the evaluation process will be an essential part of this effort, along with realistic actions to align the process with corporate strategy – gaining the support of the board chair, the CEO and the secretariat along the way.