Japan's Corporate Governance Code: A UK Perspective
Feb. 17, 2016
Across the globe, better corporate governance will be a strong focus in 2016. Just on the heels of some large corporate scandals — be it Petrobras in Brazil, Satyam in India, Toshiba in Japan or Volkswagen in Germany — legislators, regulators and investors are placing greater scrutiny on their boards of directors and demanding more tools to promote company accountability and transparency.
In Japan, corporate governance improvements are being pursued with greater tenacity, particularly following the introduction of the Japanese Financial Services Agency’s Corporate Governance Code last year, which was implemented by the Tokyo Stock Exchange and put into effect on 1 June 2015.
Further driving this transition and focus on better corporate governance in Japan is the gradual rise of foreign investors entering the market, from 5% of the total market value in the 1970s, foreign investment into Japan has jumped to 32% in 2015. Along with capital, foreign investors into Japan have brought along expectations for greater disclosure and accountability.
In a white paper, BCCJ Corporate Member, FTI Consulting (Asia) Limited, has made a comparison of the UK and Japanese Corporate Governance Codes and outlined a number of areas where the UK experience might provide valuable lessons.
Some of the key themes in the Japanese and UK Codes are similar, for example the responsibillities and the independence of the Board, the internal risk and control framework, and engagement with stakeholders. However, implementing corporate governance in a practical and invulnerable way is often much more challenging than outlining the guiding principles.
Lessons from UK Experience
The UK experience could provide valuable lessons in the following areas:
Board Composition and Challenge
A Board must consist of directors who have the right mix of technical understanding, strategic vision and financial and regulatory knowledge. It must also be led by a strong, independent chair who encourages discussion and challenge. The Board should also play an active role in defining and requesting MI rather than relying solely on executives to provide them with the information they deem necessary.
Making Good Use of INEDs
The group of INEDs, just as the Board as a whole, should possess the right mix of knowledge and understanding of the firm’s key business and risk areas. To understand and oversee the business, INEDs must be placed at key decision-making positions.
Board members need to be kept abreast with developments in technology, business strategy and regulation, investing and participating in education programmes.
Risk Management Frameworks
The first line of business is mainly occupied with generating revenue for the firm, but it is necessary to understand, evaluate and manage the risks it brings into the firm. The second line is manifested in the Risk or Compliance functions which must be independent of the business.
A positive culture encourages employees to speak up and challenge behaviour where they believe it might harm the firm or its clients. To achieve this, firms should make honesty and integrity an essential part of hiring decisions.
Corporate governance standards rarely provide practical advice on how to deal with the specific circumstances of the firm and the operating environment it finds itself in. Lessons from other countries and industries can be invaluable.
Read more in the full white paper by FTI Consulting (Asia) Limited HERE.
FTI Consulting, Inc. provides forensic and litigation consulting, corporate finance, economic consulting and technology services. The Company offers services designed to help companies address critical issues and improve performance before encountering disputes or financial difficulties.
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