JACDJapan Association of Corporate Directors

Roles Expected of Outside Directors and Boards of Directors
Preamble
Corporate governance at listed companies in Japan is about to face a major
turning point. In line with a growing trend among listed companies towards
appointing outside directors, focus has once again intensified on the roles expectedof outside directors. Clarity is urgently needed in these roles to ensure that newly
appointed outside directors fulfill their responsibilities appropriately.
However, there are many different views about the roles expected of outsidedirectors, and there also seems to be some misunderstanding about thefundamental elements of these roles. This misunderstanding may be preventing
management from appointing or increasing the number of outside directors.
The purpose of this proposal is to present the views of the Japan Association of
Corporate Directors (JACD) on the roles expected of outside directors and theircore responsibilities.
In this proposal, JACD has identified the main responsibility of outside
directors to be provision of oversight on management. Based on this understanding,the proposal will clarify what is at the core of each outside director’s oversightfunction and the roles that should, or should not, be expected of outside directors.
A large portion of the views presented in this proposal shares many similarities
with the Monitoring Model, which is a model for boards of directors adopted
widely all over the world and that focuses on oversight on management. For mostmembers of management who conduct business in good faith, the views presented
in this proposal, and the Monitoring Model, are meant to support, and not hinder,
their business management.
While the views presented in this proposal apply to all listed companies, themain focus is placed on companies with statutory auditors (kansayaku) that arefacing an urgent need to clarify the roles expected of outside directors.
JACD hopes that a more precise understanding of roles and responsibilities
expected of outside directors will result in an increase in the appointment ofoutside directors in Japan, as well as an increase in the trust placed in boards ofdirectors by shareholders, which will ultimately increase corporate value.

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1Directors. All rights reserved.

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Japan Association of Corporate Directors

Proposal
1.

The main responsibility of outside directors and boards of directors is toprovide oversight on management (executives) rather than making business(executive) decisions.

2.

The core of the oversight function is to examine whether management’sperformance, in light of business strategies and plans developed bymanagement, is appropriate and to ultimately determine whether or not to
entrust business to the incumbent management.

3.

Specific roles are:(i) Requesting management to provide explanations on business strategiesand plans,(ii) Examining if those business strategies and plans are acceptable from thestandpoint of shareholders,(iii) Requesting management to provide explanations about management
outcomes, and(iv) Evaluating management based on the above and determining whether to
entrust business to the incumbent management.
Put differently from the perspective of the management’s responsibility,management is responsible for explaining to, and convincing, boards ofdirectors that include outside directors that the business strategies and plans
are legitimate and that performance of those strategies and plans isappropriate.

4.

In addition to the above, outside directors are expected to provide oversighton management from the following perspectives: enhancing the reliability offinancial information that forms an important basis for evaluation ofmanagement and investment decisions by investors; maintaining
management compensation at an appropriate level in proportion to theirperformance; preventing management from committing acts that constitute aconflict of interest; and developing an effective risk management framework.

5.

Oversight on management does not mean that outside directors and boardsof directors conduct management. When a board of directors makes

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2Directors. All rights reserved.

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Japan Association of Corporate Directors

decisions on the execution of important operations as required under theCompanies Act, outside directors should determine whether the proposals bymanagement are acceptable from the standpoint of shareholders. In thissense, such decisions have a nature similar to oversight. Compared tomanagement, outside directors, as outsiders, tend to lack special knowledge
or information regarding business operations. Therefore, the responsibility ofoutside directors is not to make decisions on individual business operations,but rather to leverage their expertise in evaluating management and theentire business in order to increase corporate value.
6.

The board of directors should fully deliberate matters that are appropriate
for oversight by outside directors. At the same time, decisions on individual
business operations should be delegated to management to the extent
permitted under laws and regulations, except when a conflict of interest exists
between management and the company.

7.

Oversight on management does not mean that outside directors and boardsof directors actively take actions to uncover misconduct. While outside
directors should provide oversight on the development of a risk management
framework to prevent the occurrence of misconduct and should conduct
appropriate investigations when finding indications of misconduct in thecourse of providing oversight, uncovering individual instances of misconduct
itself is not the direct purpose of oversight on management by outside
directors.

8.

The independence of outside directors is required in order for them to fulfill
the function of oversight on management. Considering that at the core of an
outside director’s function of oversight on management is the evaluation ofmanagement, each outside director’s independence from management isindispensable. Independence from management in this sense means thatoutside directors have no stake in management.

9.

The number and ratio of outside directors in boards of directors need to beincreased to enhance outside directors’ function of oversight on management.
Granting important roles and authority to a large number of outside
directors, rather than a small number, will increase the quality of oversight,

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3Directors. All rights reserved.

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Japan Association of Corporate Directors

which will in turn contribute to increasing oversight stability.
10.

It is desirable that many and diverse outside directors are appointed.
However, considering that at its core, each outside director’s function ofoversight is the evaluation of management, it is reasonable to give firstpriority to retaining outside directors who are suited to fulfilling that coreelement, e.g., those who have knowledge about business management ingeneral, such as persons who are current or former members of managementin other companies.

11.

A large portion of the views provided in this proposal shares many
similarities with the Monitoring Model. The Monitoring Model offers aframework for boards of directors that identifies the basic role expected ofboards of directors that include outside directors as being the provision ofoversight on business operations, including the appointment and dismissal ofexecutives, rather than the making of decisions on business operations. Since
its birth in the United States in the 1970s, the model has been widely adopted
by a large number of listed companies in the United States and is gaining
popularity in other countries. For most members of management who
conduct business in good faith, the Monitoring Model serves as a framework
for receiving support for their management from shareholders throughoutside directors, as opposed to hindering management. The model is aneffective tool for enhancing the legitimacy of management and to support
management.

12.

There is a wide range of options available when determining theresponsibilities of outside directors and models for boards of directors. In
addition, these can vary from company to company. Even within theMonitoring Model, the main focus of oversight can vary and models forboards of directors are not limited to the Monitoring Model.
Regardless of what choice is made, providing explanations on thecharacteristics of, or differences from, the Monitoring Model is the key todeepening shareholder and investor understanding of each company’s
corporate governance.
END

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4Directors. All rights reserved.

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Japan Association of Corporate Directors

Endorsed By:
Takeo Inokuchi, Chairman of Company with an Audit Committee Workshop (SeniorAdvisor to CEO, Mitsui Sumitomo Insurance Co., Ltd.)
Minoru Sawaguchi, co-Chairman of Company with an Audit Committee Workshop (Partner ofMori Hamada & Matsumoto)
Kazuhiko Toyama, Chairman of Committee on Independent Directors. (CEO, Industrial GrowthPlatform, Inc.)
Seiichi Ochiai, co- Chairman of Committee on Independent Directors. (Professor emeritus,Tokyo University)

About JACD:
Founded on the highest ethical principles, the Japan Association of Corporate Directors (JACD)
is a forum for practicing executives to study and experiment with corporate governance. TheAssociation was founded on March 13th, 2002. JACD’s 250 members represent corporate
executives, institutional investors, lawyers, accountants and university professors.

JACD

Mission JACD is a group of CEOs and corporate directors whose aim is to encourage Japanesecompanies to take an active interest in corporate governance and to become more competitive
globally through the study of governance and management.

Contact :http://www.jacd.jp/en/

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