Independent in appearance

July 7, 2009

Japan is edging towards the introduction of independent directors and auditors for publicly listed companies, but so far even the idea of having someone from outside at the top of a company remains a foreign concept.

The tradition is for someone to join a Japanese company at age 22 with the ultimate goal of serving on the company board, says Takeyuki Ishida, the head of Japan Research at RiskMetrics Group, which advises institutional investors on how to vote their shares.

Such a tradition of insider appointments means that even if the government requires companies to appoint at least one independent director or an independent auditor — as a recent government discussion report suggested — it might be a classic case of Japanese “tatemae” (appearance) rather than “honne” (substance).

A reluctant company, faced with such a requirement, might ask their friendly bank or accounting firm to find someone for them — and end up with an ex-staff member, Ishida told the Reuters Japan Investment Summit.

Shareholder activism got a shot in the arm in Japan when foreign fund Steel Partners won a proxy battle in May over the management and directors of Aderans, a wigmaker.

On the surface, the activism has since gone quiet again but both Ishida and Jun Frank, from rival proxy advisory firm Glass Lewis & Co, say change is happening among investors in Japan.

While many investors still return empty ballots, leaving Japanese companies to decide how to vote their shares, the just completed round of annual shareholder meetings did see more tension, they both say.

Japanese companies don’t report in detail the results of board elections but both Ishida and Frank say they have heard that this year’s meetings saw higher protest votes.

Although the lack of disclosure of voting results, of course, mean there is no way for investors to see that for themselves.

Photo credit: REUTERS/Toru Hanai

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