Counselor's Office
Civil Affairs Bureau
Ministry of Justice
Post: 1-1-1 Kasumigaseki,
Chiyoda-ku
Tokyo 100-8977
Japan31 January 2012

Email: minji27@moj.go.jp

Re: Interim Proposal Concerning Revision of Companies Act

Dear Sir:This letter is jointly submitted by Sodali and J-Eurus Investor Relations Ltd. to provide a global
perspective on corporate governance issues raised by the Ministry of Justice Interim Proposal
Concerning Revision of the Companies Act (the Proposal).
Sodali (www.sodali.com) is a leading international consultancy specializing in corporate governance,
shareholder transactions and institutional investor relations. The firm’s services include corporate
governance consulting, board evaluation, investor communication, shareholder meetings, proxysolicitation, strategic research and consulting. The firm is recognized as a thought leader in mattersrelating to corporate governance and is an active participant in programs of organizations such as theInternational Corporate Governance Network (ICGN), the World Bank, Global Corporate Governance
Forum, the Council of Institutional Investors, the Conference Board and other such groups. Sodali
has offices and representatives in Athens, Geneva, London, Madrid, Milan, New York, Paris, Rome,Sao Paulo and Tokyo.
J-Eurus Investor Relations Ltd. is an independent consulting firm founded in Japan in 2000 bypioneering IR practitioners for the purpose of helping Japanese companies deal with the global
challenges of corporate governance and investor relations. The firm’s founders participate in majordomestic and international organizations on matters of governance and the capital markets,including the Tokyo Stock Exchange Best Disclosure Companies Selection Board and the ICGN Boardof Governors. J-Eurus is a thought leader on these issues in Japan and helps bring the Japaneseperspective to other global markets.
Japan is one of the world’s most successful and admired economies. For many decades Japaneselisted companies have defined success in global competitiveness and multinational operations, withone exception – corporate governance. With respect to corporate governance Japanese companies
and regulators have chosen not to embrace the reforms that during the past 25 years haveestablished a widely accepted set of global principles, rules and best practices. Japan has chosen tostand apart from these developments, preferring to rely on traditional ways of doing business inspite of criticism and pressure from the global institutional investor community, shareholder
proponents, corporate governance advocates, academics and other experts.
Japan is currently the third largest global economy, with China now in second place, and may soon
move to fourth place behind India. While market experts do not claim a causal connection between
the strength of Japan’s economy and its corporate governance practices, they do note the declining
interest in Japanese companies among international sources of equity capital as their focus shifts tomore rapidly growing markets with higher standards of excellence in corporate governance. Some ofthese markets, particularly Brazil, provide outstanding examples of effective use of corporate
governance to attract global capital. We urge the Ministry of Justice to carefully examine theexample of Brazil’s Novo Mercado, a tiered stock exchange based exclusively on corporate
governance criteria that companies voluntarily adopt in order to improve their economic
performance, lower their cost of capital, reduce risk and attract investment from outside their localmarket.
We have enormous respect for the accomplishments of the Japanese business community and webelieve that it is capable of maintaining its global leadership. However, we are concerned thatwithout a fundamental rethinking of its system of corporate governance there will continue to be aflight of global capital from Japan to other markets.
The Ministry of Justice’s Proposal represents small but meaningful steps forward. We recognize inparticular that the requirement for an independent director on the boards of Japanese companies
represents a breakthrough, both conceptually and symbolically, that deserves endorsement.
However, from a global perspective, we wish the steps were larger. In Europe, Latin America andmany countries in Asia, governance principles require listed companies to have independent
directors and best practice standards call for a substantial percentage of board members to beindependent. Among developed markets, Japan stands alone in taking exception to this fundamental
corporate governance principle.
We are hopeful that the Proposal will stimulate a broader discussion of the role, function andresponsibility of boards at Japanese listed companies. The tradition in Japan has been to view theboard is an extension of the top level of executive management. This is essentially a privatecompany model. In other markets, there is recognition that the private company model does notprovide adequate protection for the investing public and minority shareholders and is not aneffective mechanism for oversight of management and avoidance of conflicts of interest. Protectionof the public interest in listed companies has led to the establishment of the form of governancerepresented by the “Corporate Governance Triangle” (see Appendix 1), in which the board’s role inoverseeing management and representing the interests of the company and its investors is critical.
This role can be performed effectively only if the board is independent from management.
While the addition of a single independent director represents an important symbolic change, we areconcerned that it may be insufficient in practical terms. A single independent voice may not beeffective in a board dominated by insiders and former executives, particularly in a culture whereconsensus is the goal. Accordingly, we urge the Ministry of Justice to open the door to more
independent directors at Japanese companies, either voluntarily or though regulatory incentives.
Again, the techniques adopted by Brazil’s Novo Mercado are instructive.
We urge the Ministry of Justice also to consider the core corporate governance principles andstandards that are now the global norm. These principles have been developed with the backing ofimportant organizations such as the OECD, the World Bank, the European Commission, the U.S.
Securities and Exchange Commission, the UK Financial Services Authority, global stock exchanges
such as the New York Stock Exchange, many local financial market regulators, and have beenendorsed by influential groups such as the International Corporate Governance Network, the Councilof Institutional Investors and countless business groups and organizations representing boards ofdirectors. Common to all these groups is insistence on a clearly defined role for the board ofdirectors of listed companies that includes:--A clear separation between the duties of board and responsibilities of executive management.
An independent oversight role for the board as representative of all constituencies affected by thecompany’s business, particularly the providers of capital and the shareholders for whom the board
acts as elected representatives.
A majority of independent directors responsible for exercising business judgment in the best longterm interest of the business enterprise and its investors.
Three key standing committees of independent directors: (i) nominating and governance committee,(ii) compensation committee, (iii) audit committee.
A focus on policies defined collectively as “ESG” (environmental practices, social policy andgovernance) that protect the rights and interests of all constituencies and promote the company’slong-term sustainability.
These core principles do not necessarily dictate a single standardized form of corporate governance.
Indeed, in different countries corporate governance achieves its goals in many different ways, while
following the road map of these goals. Although Japan’s approach to corporate governance hashistorically been rooted in the U.S. “rules-based” system, we recommend that the “principles-based”
approach, which dominates in all markets outside the U.S., offers a better model for governancereform in Japan. Principles-based governance relies on a voluntary “comply-or-explain” mechanismthat gives companies broad discretion and flexibility to determine the corporate governancearrangements that are most effective for their individual company. However, they must explain why
actual or perceived non-compliance with governance norms makes sense in their particular
circumstances. This discretionary but rigorous approach would provide a path for Japanesecompanies to adopt over time a new set of customized corporate governance practices that meet theexpectations of the global business and financial community.
The goal should be for Japanese companies to adopt what is best in global corporate governancestandards while preserving what is best in Japanese business culture and practices. We are confident
that Japanese companies are capable of achieving this goal.
We appreciate the opportunity to express our views on these important issues.
If you have any questions, please feel free to contact the undersigned.
Respectfully submitted,

John C. Wilcox

Yoshiko Iwata

ChairmanPresidentSodali.
–1221 Avenue of the Americas
Suite 4200
New York, NY 10020

J-Eurus IR Co., Ltd.

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1-11-1 Marunouchi, Chiyoda-ku,
Tokyo 100-6208

–The Corporate Governance Triangle© 2007 Sodali, All rights reserved