Under the Corporate Law, a corporation is established through the investment by shareholders for the purpose of profit, but the management of the company is left to the directors appointed by the shareholders at the general shareholders meeting. The Board of Directors makes basic decisions to fulfill the business of profit, and its execution is left to the executive officers selected by the Board of Directors. Here, it is not required that directors and executive officers be shareholders.
Shareholders contribute to investment and bear the risk of business, but they do not manage. For this reason, the conflict of interest between the shareholder who is the investor and the executive officer who actually manages is a problem. The mechanism to solve this is corporate governance.
A modern best practice in corporate governance is a system in which a board of directors is formed mainly by independent directors and management is entrusted to an executive officer of another person not necessarily from the director. In this case, the division of the business is devoted to executive officers focusing on management and the board of directors concentrating on supervision of executive officers. This is the separation of governance and management.
Under this scheme, it is necessary to establish the executive structure – management system – optimum for profit-seeking by CEO, and governance system to motivate the CEO towards profit-seeking by the supervisory governance of the Board of Directors.
The JCGR Corporate Governance Principles is to show the code of conduct of the Directors, the Board of Directors, and the CEO under such a structure.
In this principle, the chief executive officer, or CEO, means the representative executive officer of a company with committees and the representative director of a company with a board of corporate auditors. In addition, management, management, and business execution are synonyms.
1. The Board of Directors appoints excellent talent as CEO and utilizes an incentive system that embeds performance into performance-linked remuneration so that CEOs will best manage for profit.
2. The CEO observes laws, internal regulations, social ethics, etc. – Compliance – In addition to fulfilling market principles, the CEO will fair stakeholders as well as shareholders.
3. The CEO will do the best with responsibility.
4. The majority of the board members shall be independent directors defined by the Tokyo Stock Exchange.
5. Independent directors do not concurrently serve as executive officers.
6. When nominating the candidates for director to be submitted to the shareholders meeting, the emphasis is placed on diversity from the perspective of experience, gender, nationality, and age.
7. When nominating the candidates for director, their roles expected by the board to the individual candidate shall be clearly stated.
8. The term of the directors shall be one year and shall not prevent re-appointment. However, in reappointment, judge whether it is possible or not based on the criteria for election of directors. Also, no limit should be placed on the number of directors reappointed so as not to compromise the experience in the company.
9. Directors shall (1) submit their resignations themselves and entrust their decision to advance or withdraw to the Board of Directors when they judge themselves that they can no longer fulfill their expected role or (2) when they reach a certain age (e.g., 75 years old).
10. The candidate for the board of directors holds the number of shares held by the Board of Directors before taking office.
11. A newly appointed director must receive training on corporate governance at authoritative institutions.
12. Directors participate in decision-making regarding the business affairs of the company at the Board of Directors.
13. Directors confirm that contributions of shareholders and creditors are properly preserved as assets. Also, directors confirm that the financial control system and the internal control system function soundly. When this cannot be confirmed, directors prompt the CEO to take corrective action.
14. Directors acquire information from executive officers, internal auditors, external experts and etc. as necessary. Therefore, directors should be cautious enough in case of appointing executive officers, external experts, and so on.
15. Directors attend important management meetings as well as board meetings to give advice and others. In order to fulfill the duty, directors should prepare accordingly and should not spare time and effort. At the same time, the company should appropriately provide directors with the information necessary.
16. Directors propose the agenda of the Board meetings at their discretion before or at the meeting.
17. Independent directors and non-management directors hold meetings with the approval of the board of directors on a regular basis and when necessary. Irrelevant of the board meeting agenda, they discuss various matters freely. If necessary, the report or advice to the Board of Directors or the CEO.
18. Based on the provisions of the Company Law, the Board of Directors makes decisions regarding business affairs that have a material impact on shareholders’ interests.
19. The board of directors shall preside as the chairman by the independent director. In the case where the CEO serves as the Chairman of the Board, the Board of Directors will discuss the pros and cons.
20. The Board of Directors defines the qualities required of the directors and establishes criteria for election and dismissal of directors. Necessary qualities are judgment, experience, independence, comprehension about the company and industry, and other abilities and knowledge that the Board deems necessary.
21. The Board of Directors meeting shall be held at least six times a year. Prior to the meeting, the Chairman of the Board notifies the Director of the agenda and provides information related to the agenda.
22. The Board of Directors meeting discusses basic policies of management strategy, financial strategy, and risk management at least annually.
23. The burden of the CEO is dramatically increasing under the modern complex management environment. Regarding matters that are essentially related to the responsibility of the CEO but that may have a significant influence on shareholder value, the Board of Directors should be is involved in determining or confirming the basic policy of those matters. For example, internal control systems, IT systems, corporate pension systems, CSR (corporate social responsibility), environmental measures, and so on are such matters.
24. The Board of Directors shall secure the functions of nomination, remuneration, and audit to fulfill the supervisory function. For that purpose, a nominating committee, a compensation committee, and an auditing committee shall be established under the Board of Directors, with the majority of the independent directors.
25. In consideration of the characteristics of the company, the Nominating Committee establishes requirements such as qualifications, knowledge, expertise, etc. to be held by internal directors and external directors, respectively. In accordance with the requirement, the Nominating Committee determines the candidates for the board of directors to submit to the shareholders meeting. Because the most important duties of the directors are to oversee the management by executive officers, the emphasis is placed on independence as a characteristic of the directors. Also, the Nominating Committee determines the subcommittees to be established under the board of directors, and the directors who are the members and chairpersons of the subcommittees. The three committees above are the fundamental subcommittees for the supervision of the Board of Directors.
26. The Compensation Committee determines an incentive reward system centered on performance-based compensation, including share-based compensation, to motivate the CEO and other executive officers toward company profit.
27. The Audit Committee examines the independence of internal auditors who audit the effectiveness of the internal control system as a part of the management system. Also examines the independence of external auditors who audit the accounting report.
28. Three committees respectively shall determine the purpose and the duties of each committee as a charter at the beginning of the fiscal year, summarize the committee activities at the end of the fiscal year. Finally, each committee evaluates its activities in accordance with the purpose and the duties and report the evaluation to the Board of Directors.
29. Based on the reports of each committee, the Board of Directors urges the CEO to take appropriate actions.
30. CEO aims to realize performance targets given by the Board of Directors. To ensure that the CEO’s management does not rely solely on the CEO’s personal qualities, the CEO must build and maintain a rational management system.
31. Emphasizing the importance of internal control as a part of risk management, CEO strives to design and maintain the best internal control system.
32. As for the internal audit, which is a function to check the effectiveness of internal control, the CEO is in charge of the internal audit and responsible for ensuring the independence of internal auditors who are CEO’s subordinates.
33. It seems that it is not easy to find cheating by high ranked officials’ conspiracy, but it is by no means impossible. Information on fraud is certainly shared by a few employees other than conspirators. Internal auditors should make effective use of the internal reporting system.
34. The CEO decomposes the performance targets of the entire company into business divisions and subsidiaries and oversees the business department heads, subsidiary CEOs, etc. according to their performance targets. In other words, performance evaluation is conducted according to performance targets, and an incentive compensation system based on performance evaluation is implemented.
35. In order to secure the trust of shareholders, CEO fulfills accountability by closely communicating with shareholders through IR, shareholder meetings, etc.
36. In order to conduct fair transactions with stakeholders other than shareholders, the CEO must observe the law and observe market principles that are the premise of the capitalist economy. The CEO must faithfully implement compliance management.
37. As a part of internal control, the CEO ensures the ability to monitor compliance separately from internal audits.
38. In addition to reporting the status of compliance with the Board of Directors, the CEO must provide all stakeholders with appropriate disclosure.