Reform After a Decade of the Companies Act: Why, How, and to Where?

Abstract

A bill to amend the Companies Act is now pending before the Diet. This is the first reform since its enactment in 2005. It is the outcome of deliberations that commenced the year following the DPJ’s ascension to power in 2009. However, their attempt to impose the mandatory requirement of nominating at least one outside director in public companies failed, not least because their supporting groups – including the employees – did not appreciate the shareholder primacy model of corporate governance. Instead, the Legislative Council adopted many items of reform that may be effective in addressing the conflicts (agency problem) between the controlling and minority shareholders. Such conflicts emerged as a serious problem when several of the newly established companies failed to grow after their initial public offerings and exploited the general shareholders. Interestingly, after the Legislative Council concluded its deliberations, the LDP, which had returned to power in the meantime, exerted political pressure to include a provision requiring public companies to give “reasons for not nominating independent directors” at the general shareholders’ meeting. The LDP even announced its intent to continue corporate governance discussions by drafting a corporate governance code. These developments might imply that the amendments of 2014 do not stand alone, but instead constitute a step in the Japanese economy’s process of meeting the demands of the capital market.