The Female Factor in Japan’s Corporate Governance: Board Independence, Diversity, and Sustainability

“We need a female independent director, now!”

If you work in executive recruitment, particularly in Japan, you may be getting these phone calls very frequently nowadays. Following the second revision of Japan’s Corporate Governance Code (often referred to as “the Code”) in June 2021, many listed companies started a frantic search for talent suitable for independent director positions—and many of them are looking for women.

The female factor in Japan’s corporate governance is on the rise.

The Code in Japan

The Japanese business community embraced the practice of corporate governance relatively late. It wasn’t until March 2015—following accelerated globalization and a string of corporate frauds—that the Financial Services Agency and Tokyo Stock Exchange jointly established Japan’s first Corporate Governance Code.

The Code stipulates a specific set of principles and guidelines of corporate governance for listed companies. It aims to guide those companies to achieve sustainable growth and increase corporate value over the mid-to-long term.

The Code received its first revision in 2018, and then another this year. This latest update proposes the addition of three points:

1. Enhancing board independence

2. Promoting diversity

3. Paying greater attention to sustainability and environment, society, and governance (ESG) goals

What is the relationship between these three points, particularly when it comes to generating higher corporate value? To answer that, there’s some underlying logic we need to understand. It can be explained by a simple formula:

Board Independence + Board Diversity = Business Sustainability

Risk and Sustainability

As traditional finance theory suggests, corporations used to be encouraged to take higher risks to generate higher returns. However, as we learned over time, those risks came with widening economic gaps among populations and significant damage to the environment. According to Pew Research Center, the wealth gap between America’s rich and poor more than doubled between 1989 and 2016. Meanwhile, the World Economic Forum predicts that climate change will see one-third of the world living in desperately uncomfortable conditions by 2070.

Much of that damage can be traced back to reckless corporate risk-taking.

With urgent calls for sustainability and ESG in recent years, corporations are no longer allowed to continue exploiting limited resources or ignore the various concerns of stakeholders. The challenge for business leaders today is finding innovative ways to secure adequate returns for shareholders while significantly lowering the level of risk and damages associated with their business activities.

On top of supervision by societies and regulatory authorities, the Code was designed to play a decisive role in promoting the oversight of management decisions. To do that, companies need to bring in qualified, independent directors who can represent the diverse interests of both shareholders and societies—and stop corporations from damaging enterprise value.

The Female Factor in Japan’s Corporate Governance

The Code requires Japanese boards to be diverse in various ways, including gender, international experience, work experience, and age. In response, many companies are finding an easy place to start: female independent directors.

The Code dictates that women should make up one third of all of Japan’s board seats (that’s 24,777 seats within public companies nationwide as of March 2021). So how easy (or difficult) will it be to meet that quota for the female factor in Japan’s Corporate Governance Code?

According to data by Tokyo Shoko Research, Ltd., among 2,220 public entities, 7.4% of Japanese corporate board members were women as of March 2021. To meet the Code’s one-third target, Japanese corporations need to recruit an additional 5,600 qualified women.

It is undoubtedly a challenging journey, but giving up is not an option. Different organizations are taking on the challenge in different ways, though there are a few emerging trends. Many are seeking out female attorneys and academics for director positions. Former C-suite women, though scarce, are also willing to step in and pave the way.

Nikkei Business Publications reported (in Japanese) a promising number for companies in the first section of the Tokyo Stock Exchange, as of July 1, 2020: 927 women serving as outside directors. That’s an increase of about 20% from 2007, and a fifteen-fold increase over nine years. The report goes on to say that “the number of companies that have appointed two or more female outside directors increased to 171, up from 107 in 2007.” Among these, the leaders were Sony, Mitsubishi Motors, and Mitsubishi UFJ Financial Group, Inc. Each has four women serving as outside directors on their boards.

In other words, diversity on boards is, at last, accelerating.

The Future of Women on Japanese Boards

The female factor in Japan’s corporate governance has just started to emerge. But thanks to a clear directive set out by the Japanese Corporate Governance Code, women in board director positions are sure to be more prominent voices in Japan’s business landscape in the coming years.