Japanese companies with directors that sit on multiple boards are facing the equity market’s displeasure as the Tokyo Stock Exchange steps up pressure to improve corporate governance.
The bourse tightened listing guidelines in 2022, demanding that firms in its blue-chip Prime section get at least a third of their board members externally. While most companies have tried to meet this request, they are speeding up the process by taking on members already serving on other boards.
That has led some companies to hire directors who were too overstretched to focus on maximising shareholder value. Since April 2019, these firms have underperformed the broader stock market by 8.6%, while the rest beat it by 3.5%, said Akemi Hatano, the chief quants strategist at SBI Securities.
“Outside directors are supposed to bring in different ideas without providing lip service to management,” said Hatano, who estimates that 30% of the Prime section’s 1,640 firms have directors on more than one board. “If companies are relying on ‘moonlighting’ directors, that could be a sign of weak governance.”
Japan’s corporate governance reforms have been a key factor in the stock market’s climb to a record earlier this year. The push to get more outside directors was aimed at broadening the perspective of boardrooms, addressing the concerns of minority shareholders and improving management’s objectivity.
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But investors are far from satisfied, saying that some companies still refuse to let their outside directors have a direct dialogue with shareholders.
“In the last couple of years, we suddenly had many meetings with outside directors,” said Taku Ito, the chief equity fund manager at Nissay Asset Management. “Some are ready to meet us, but a lot who have positions in multiple companies, and frankly those who became a director just because of their past connections, simply don’t want to meet.”
SBI’s Hatano said that part of the reason why some companies are “doubling up” on directors is because there is a limited supply of suitable candidates. Other analysts are less bothered by the practice, saying that serving on two boards simultaneously is fine as long as the lines of communication between directors and shareholders are clear.
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The TSE said in August that it will likely publish an updated report in November on how companies can align their thinking with investors.
With more than 95% of companies on the Prime section complying with the exchange’s guideline, there is a broad consensus that focus is shifting to quality from quantity when it comes to outside directors and corporate governance.
“Governance reform is still halfway,” said Yuya Fukue, a trader at Rheos Capital Works. “It will take time before it reaches every corner of the market. But there is no denying that the guidelines are prompting change.”
Chart: Bloomberg
