Japan Audit & Supervisory Board Member s Association

Background and Goals
New Recommended English translation of “Kansayaku” and ”Kansayaku-kai”

Hiroyuki Kansaku, Professor of University of Tokyo Graduate Schools for Law and Politics
Kazuhiro Takei, Attorney at Nishimura & Asahi

1.

Announcement of the new English translation
Japan Corporate Auditors Association (the “Association”, currently Japan Audit &Supervisory Board Members Association) published a new recommended English
translation for “Kansayaku” and “Kansayaku-kai” on September 4th, 2012 as below, after
they received a recommendation from the advisory committee on the English translation of“Kansayaku” and ”Kansayaku-kai” (the “advisory committee”, members of which are asbelow) . 1

Kansayaku

Audit & Supervisory Board Member

Kansayaku-kai

Audit & Supervisory Board

The members of the advisory committee
on the English translation of “Kansyaku” and “Kansayaku-kai”
Chairperson

Kazuhiro Takei, Attorney at Nishimura & Asahi.

memberHiroyuki Kansaku, Professor of University of Tokyo Graduate Schools for
Law and Politics

memberTakaya Seki, Managing Director, Corporate Practice Partners, Inc.

memberRiyo Ihara, Member of Audit Committee of Japan Broadcasting Corporation

memberYoichiro Ichimaru, Full-time Kansayaku of Toyota Motor Corporation

memberTeruo Miyamoto, Secretary-general of Japan Audit & Supervisory BoardMember s Association

We are the members of the advisory committee and will introduce the discussion
about the new recommended English translation. It must be emphasized that this newrecommended English translation is based on a philosophy concerning the fundamentalrole of “Kansayaku” and “Kansayaku-kai” in corporate governance. We reviewed theEnglish translation for “Kansayaku” and “Kansayaku-kai”, taking into account many
opinions from various experts in corporate governance.
1

This is only a recommended translation, as before. The other translation won’t be prohibited fromuse.

12.

History and Backgrounda“KANSAYAKU”, “Statutory Auditor” and “Corporate Auditor”
The Association had reviewed the English translation for “Kansayaku” and“Kansayaku-kai” several times. According to the Association, the English translation of“Kansayaku” was first examined on March 1989. The association adopted “KANSAYAKU”
as the primary English translation and “Statutory Auditor” as the supplementary
explanation.

After that, the Association examined the English translation for “Kansayaku-kai” since the “Kansayaku” system was reinforced and the “Kansayaku-kai” system wasintroduced in the revised Japanese Commercial Code in 1994. The Association
recommended a new English translation, “Corporate Auditor” for “Kansayaku” and “Boardof Corporate Auditors” for “Kansayaku-kai”.

b

Background - the drawback of the term “Auditor”“KANSAYAKU”, “Statutory Auditor”, and “Corporate Auditor” etc. were not incorrecttranslations and many Japanese corporations often used these translations. However, overtwenty years has passed since the last review and foreign investors’ holding ratios in listedcompanies in Japan has dramatically increased. Indeed, some institutional investors andinfluential proxy advisors have pointed out that reviewing the English translation mightrelieve unfamiliarity with the “Kansyaku” system.2
The term “Statutory Auditor” or “Corporate Auditor” has a serious problem; It is hard tounderstand the difference between a “Kansayaku” and an internal auditor or an externalauditor. The mission of “Kansayaku”, including monitoring and supervising management,
was totally different from the mission of an internal auditor or an external auditor.3
More important, there are two corporate organizations other than a company with a“Kansayaku-kai” in Japan; A “Company with committees” (Iinkai secchi gaisha) and a“Company with Audit and Supervisory committee” (Kansa-kantoku i-inkai secchi gaisha)4.
Whichever organization a listed company adopts, substantially the same standard ofsoundness and effectiveness of the management would be demanded of the company.

Areview of the English translation was expected to clearly explain the missions of2

An example which was published, Takeyuki Ishida, Looking back the ordinary general meeting ofshareholders in June, 2012, No.730, Tokyo Kabushiki Konwakai Bulletin, 7 (2012)3

An important indication regarding the meaning of “Kansa”, Yoshiki Nishiyama, Lecture series for newKansayakus - What is Kansayaku -, No.587, Monthly Kansayaku, 46 ff (2011)

4“Company with audit & supervisory committee” was proposed as a new corporate organization in thedecision of Legislative Council of the Ministry of Justice, the draft outline of amendments to theCompanies Act, September 7th, 2012. The advisory committee took into account that a “Companywith audit & supervisory committee” is likely to be legislated into existence.

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“Kansayaku” and “Kansayaku-kai” and to demonstrate the equivalence of the soundness
and effectiveness standards for companies with “Kansayaku-kai” and for the othercorporate organizations.
In addition, Japanese corporations have found a larger market abroad and more
Japanese corporations have foreign subsidiaries, and as a consequence, the “Kansayaku”
of a Japanese parent corporation increasingly takes on the “Kansa” function of the foreignsubsidiaries. Therefore, to explain Japanese corporate governance’s rationale, there has
been an increasing need for a clear English translation for “Kansayaku”.

3.

“Audit & Supervisory Board Member”

aReview principle
We understood that a perfect English equivalent for “Kansayaku“ might not exist.

Therefore, Our principle was to clarify the purpose of reviewing a translation and to find themost appropriate translation to meet the purpose. We selected the translation from theperspective of enhancing the global understanding of a “Kansayaku” and a “Kansayaku-kai”
as described at 2-b.
It was not beneficial to understand that there was large difference between themissions of a “Kansayaku”, a “audit committee member”, and a “supervisory & auditcommittee member”, since they were all non-executive directors and were in charge ofmonitoring and supervising management. We made its review considering the compatibility
between the systems of a “company with a Kansayaku-kai”, a “company with committees”
and a “company with a supervisory & audit committee”.

bSupervisory function of “KANSAYAKU” and “KANSAYAKU-KAI” in a corporation

with Board of Directors
The limited liability company is a popular organization in the world and a large scale
limited liability company, including a listed company, is generally supposed to have amanagement supervisory function. A supervisory function is necessary because executive
directors might manage the company against shareholders’ and other stakeholders’interests, using the company’s personnel, assets and money.5
Non-executive directors are expected to be in charge of the supervisory function since
the supervisory target is executive directors’ management. The Japanese Companies Act
requires non-executive directors, including a “Kansayaku”. A “Kansayaku” is a non-5

Shareholders might be negligent of corporate management since their liabilities are limited, although
limited liability companies can run risks and exert an influence on society. Therefore it is also
important to supervise a limited company’s action in which managers and shareholders both might
be negligent. In this case, stakeholders exercise supplemental supervision in addition to nonexecutive officers’ supervision.

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executive director by statutory definition. When we tried to explain the functions and thebenefits of a “Kanasayaku” and a “Kansayaku-kai”, it was most natural to understand that a“Kansayaku” and a “Kansayaku-kai” are in charge of the supervisory function in a broad
sense6, considering the global understanding of a limited liability company’s governance.
The supervisory function is globally emphasized in a limited liability company,
especially a listed company. It is not too much to say that the supervisory function is anindicator of corporate governance.
Regarding the supervisory function in a Japanese limited liability company, K.K., in a“Company with committees” and a “Company with a supervisory & audit committee”, theboard of directors are in charge of the supervisory function. On the other hand, in a“Company with a Kansayaku-kai”, which is the most popular form in Japan, the board ofdirectors, the “Kansayaku” and the “Kansayaku-kai” are jointly and cooperatively in chargeof the supervisory function (see the chart below. The supervisory board is boxed with abroken line). The Board of directors appoints and dismisses executive directors, and the“Kansayaku” and the “Kansayaku-kai” check whether the executive directors perform their
duty of care and fiduciary duty. The “Kansayaku” is obliged to attend directors’ meetings
and to report various circumstances. The Japanese Companies Act describes the functionof the Board of directors as “Kantoku” (supervisory) (Article 381(1)) and the function of a“Kansayaku” as “Kansa” (Article 362(2)(ii)), but the understanding that “Kansa” of a“Kansayaku” and a “Kansayakukai” was a part of a supervisory function (a supervisory
function in a broad sense) in a limited liability company is the most natural explanation as towhy the Act requires a “Kansayaku” and a “Kansayakukai” to be non-executive directors.
The “Kansa” function of a “Kansayaku” and a “Kansayaku-kai” mainly consists of (a)information gathering7, (b) various actions including reporting, advice, and proposals for theboard of directors, (c) reconciliation of conflicts of interests between executive directors andthe external auditor (an Audit committee is generally in charge of this function outside ofJapan), and so on.
We have reasoned that one reason why the “Kansayaku” system is difficult forforeigners to understand is a lack of awareness that a “Kansayaku” and a “Kansayaku-kai”
are in charge of the supervisory function, cooperating with the board of directors.

c

Audit & Supervisory Board
Considering the above, We finally recommended “Audit & Supervisory Board Member”

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the supervisory function in a narrow sense is a board of directors’ supervisory function in Article 362
of Japanese Companies Act.

7

Information gathering by outside directors or board of directors is not stipulated in the JapaneseCompanies Act and is a matter of statutory construction. One of the reasons for this was that theLegislator took for granted that a Kansayaku is in charge of information gathering for supervision as
per the Japanese Companies Act.

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for “Kansayaku” and “Audit & Supervisory Board” for “Kansayaku-kai” as the newtranslation.8 This translation has the advantage that it clearly illustrates the point that a“Kansayaku” plays a part in the supervisory board. Our majority comment was that using
the term “board” would make this more easy for foreign people to understand.
We were aware that people might misunderstand that (a) a “Kansayaku-kai” was theonly supervisory organ, ignoring the board of directors, and (b) a “Kansayaku-kai” had theright to appoint and dismiss executive directors like a German supervisory board(Aufsichtsrat). We felt that adding the term “audit” was appropriate, since a “Kansayaku”’
was in charge of important functions that audit committees generally have outside of Japan,including the reconciliation of conflicts of interests between executive directors and theexternal auditor and the monitoring of internal controls. We believed the term “audit” would
prevent people from misunderstanding that a “Kansayaku-kai” is the only supervisoryorgan, ignoring the board of directors. Moreover, the term “audit” would clarify that
“Kansayaku-kai” carries out an audit function as a part of its supervisory function.

dCompatibility of “Kansayaku-kai”, “Audit Committee” and “Audit & Supervisory

Committee”
Once an audit by a “Kansayaku” or a “Kansayaku-kai” is considered as an effective
way of supervising, it becomes clear that a “Kansayaku” and a “Kansayaku-kai“ arecompatible with an audit committee of a company with committees and an audit &supervisory committee of a company with an audit & supervisory committee9, that is, that
there is no substantial difference between these corporate organizations at a governancelevel10.

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Other possible translationsaNon-executive Director
From the perspective of foreign investors’ familiarity, “Non-executive Director” (NED)

was one possible translation, which is an ordinary term in UK. This translation would not8

Even if a company had a “Kansayaku” but did not have a “Kansayaku-kai”, the advisory committee
recommends the translation, “Audit & Supervisory Board Member” for “Kansayaku”. The Supervisory
Board consists of a board of directors and a Kansayaku.

9It was the intent of the Legislator to give the Audit & Supervisory Board new supervisory authorities,
such as (a) statement of opinions on appointments, dismissals and remuneration, etc., of directors
who are not audit & supervisory board members, and (b) the power to pass resolutions approving
such transactions that give rise to a conflict of interest between the company and the directors, torebut a presumption of breach of the directors’ duties (1(4)(vii)(viii)(ix), Chapter 1, Part I, the draft
outline of amendments to the Companies Act).

10

Although “Kansaku” is a single-person organ, it was possible to understand “Kansa” as a part of asupervisory function in a broad sense.

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have been entirely incorrect. However, we felt (a) that there was a nuance of outside
officers in the translation, while a “Kansayaku” is non-executive but not necessarily outside,and (b) that the term “director” has been already established as the translation for“Torishimariyaku”. Therefore, we did not adopt the translation “Non-executive Director”.

bStatutory Supervisor
Eastern Asian countries have similar “Kansayaku” systems which are nonethelesssomewhat different from each other, and the most common translations were “Supervisor”
for an individual and “Supervisory Board” for an organization. Since Korea and Taiwan haveimported the Japanese corporate system, their systems are very close to the “Kansayaku”
system. Therefore another possible translation was “Supervisor” or “Statutory Supervisor”.
However, we felt (a) that the term “Supervisor” did not have global familiarity since the term
was used only in some Asian countries, and (b) that there was a slight nuance of only asupervisor for the rank and file of the company. Therefore, we did not adopt the translation“Statutory Supervisor”.

cOversight Board
The other possible translation was “Oversight Board”, since the functions of a“Kansayaku” and a “Kansayaku-kai” were often regarded as overseeing. However, there
seemed to be no examples of using “Oversight Board”, and we did not adopt thistranslation.115Conclusion
We wanted to ensure that any new translation would endure the passage of time. If acompany is comfortable using the previous translation of “Corporate Auditor”, it won’t becompelled to use the new translation. However, we believe that the new translation will help
to explain the “Kansayaku” system with greater accuracy and depth to investors and otherinterested parties outside of Japan.

11In addition, the advisory board discussed the translations, “Governance Committee” and some otherpossible translations with the term “Monitoring”, but did not adopt them.

6Chart: Variations on corporate governance systems and on the organs
responsible for the supervisory function in a broad sense1.

Company with a “Kansayaku-kai”

General meeting of shareholders
appointment of directors
and Kansayakus
Supervisory Function in a broad sense(supervisory board)
Kansayaku-kai =Board of Directors

attendance andAudit & Supervisory Board

reportingDirector

opinionstatement

Kansayaku=
Audit & Supervisory Board Member

supervision(appointment

Kansa as a part of supervision, including action forand dismissal of executive

pursuing liability

officers)Management=executive officers

including CEO（*executive officers must be directors. Article
363(1) of Japanese companies act）

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2.

Company with committees (I-inkai secchi gaisha)
General meeting of shareholders

appointment of directors

Board of Directors (Supervisory Board)

Audit Committee

Directornominating committee
Director/ Audit Committee Member

remuneration committee
Kansa as a part of supervision
liability

Supervision (appointment and dismissal ofexecutive officers)

Management = executive officers

including CEO（* directors can be executive officers）

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including action for pursuing

3.

Company with an Audit & Supervisory Committee (Kansa-kantoku i-inkai secchigaisya)
General meeting of shareholders
appointment of directors(+Audit & Supervisorymembers）

Board of Directors（SupervisoryAuditBoard）& Supervisory Committee(Kansa-kantoku i-inkai)

Director
Director/ Audit & Supervisory Committee Member

audit & supervision
including action for pursuing liability（責任追及の提訴を含む）
Supervision (appointment and dismissal of executiveofficers(選定・解職等)
Management = executive officers

including CEO(*executive officers must be directors）

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