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Corporate Governance Training : Building the Base for ESG

Nicholas BenesRepresentative DirectorThe Board Director Training Institute of Japan

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There is Such a Thing as “Corporate Governance Culture”, and It Has an Impact• Detailed study, “CG Watch 2010”, by CLSA and Asian Corp. Gov. Association

• Results: (a) Lack of “CG culture” is dragging down the CG score of every single market in Asia; (b) a 10-point difference in individual scores was associated with improved stock performance; (c) cutting out low-scoring companies improved portfolio returns. (= Higher returns for lower risk)

(Note: a “world-class total score would be about 80%)

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“CG Culture” in Asian Countries Has Many Common Characteristics

Board members tend to respect hierarchies or perceived authority and rank. This can lead to less rigorous oversight

A relatively low proportion of arguably, or truly, independent directors

A tendency for “form over substance” in disclosure and CG practices

Many founder-controlled, or listed subsidiaries

Few companies that provide clear or appropriate cost of capital measures, or long-term ROA or ROE targets

Because many “Western” CG-related laws and practices are perceived to have been “imported”, knowledge and awareness about CG, its legal basis, and its importance to society are low among many employees and middle managers who may later be promoted to the board

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Japanese Boards: Typical Patterns

Much decision-making is bottom-up and by consensus, but in the context of a hierarchy. “Omikoshi-shacho” is more frequent than “Imperial CEO”

Board members seek to both control and pander to CEO as they jockey for promotion, honor truces, keep heads low

Director compensation not linked to results, but rather hierarchy. Low incentive to take risk/return. Directors underpaid for performance

Most major decisions made before board meetings, and unquestioned

Hierarchy and consensus-building can easily subsume the rigor of boards in making decisions and conducting oversight

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Changing Corporate Governance Culture Is Very Hard to Do:

An Example From Japan

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The Tale of Company XYZ: 2004 Presentation

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XYZ Company Aggressively Tried to Change Its Corporate Culture to Stress Ethics, Compliance More

“ Corporate Ethics and ComplianceImproving the Corporate Culture

In September 2002, [we] implemented countermeasures to guard against a reoccurrence of incidents with regard to inspection and maintenance operations at our nuclear power stations. At the same time, the Company announced four commitments in the interest of creating a “Corporate system and climate of individual responsibility and initiative.” The actualization of the four commitments has been adopted as our social mission, and the entire Company is deeply involved in the effort.

To respond public confidence, it is essential to give top priority to safety in our operations. However, every employee from management to the front line of operations must once again consider that a “sense of security” can be gained only when two vital factors are both satisfied: “Assuring Safety” and “Building Mutual Trust.”

Through strict safety procedures, [XYZ Company] must make every effort to respond public confidence, beginning with the citizens of the regions in which its plants are located and extending to society at large.

1. Promoting disclosure of information and ensuring transparency of [ ] operations

Through conducting thorough information disclosure, XYZ Company has established a system of independent inspections, and is highly transparent in the operation of its [ ] plants. - Disclose information on the management and operation [ ], so the public is able to confirm that [facilities] are being operated safely

- Established a scheme to check [ ] safety and quality control by a third party.

- Conducting internal and independent audits to keep a high degree of compliance “

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(Cont’d.)“ 2. Creating a work environment where proper operations can be carried out

We will strengthen functions that contribute to proper performance of job-related duties by our employees and organizations.

- Set up an office to address ethical concerns. - Established a Discrepancy Resolution Committee, a cross-organizational committee, which handles discrepancies in [ ] - Reviewing all rules and manuals of the company.

3. Strengthening internal surveillance and reforming our corporate culture

XYZ Company is re-establishing the existing corporate culture of the [ ] Division, and is building a corporate climate which produces cooperative atmosphere.

- Establish a quality assurance system in the [ ] Division. - Energize internal communications to share an awareness of issues through every stratum and division of the Company. - Encourage exchange of views between the [ ] Division and other divisions.

4. Promoting observance of corporate ethics

We will promote observance of corporate ethics in our operations through:

- Creating systems to ensure the observance of ethics

- Offering education and training “

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It Took Concrete Measures

It promulgated detailed “Corporate Standards for Ethical Behavior” (企業倫理遵守に関する行動基準）

Replete, and covered many areas: compliance, internal relations, external relations, operations, safety, reporting, open communications, concern for the public welfare, etc.

It fortified “Organizational Structures for Implementation”(推進組織の整備）

It established a “Company Ethics Committee”（企業倫理委員会）

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The New “Organization for Implementation” Required Reporting to, and Instructions from, the Newly Created Ethics Committee

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Why Did Company XYZ Do This?

Series of misconduct cases, deficiencies in conduct were found

“Background of these cases:”

“Internal factors”…..problems in observance of the Code of Ethics and corporate culture…. Inadequacies of safety culture”

“Consequences of misconduct:” loss of public trust, financial loss

“In order to prevent similar incidents:”

“Create a mechanism that does not permit people to perform any dishonest act, and create a culture that encourages people to refrain from performing any dishonest act”

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What Does This Example Tell Us?

The important conclusion is not specific to XYZ. Many companies could have been XYZ

To meaningfully change XYZ’s culture would have required bringing in more outside executives, directors, and training programs

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What Can Policy Do? What Can Investors Do?

Hard and soft law can require boards to:

Adopt and disclose CG guidelines that also cover “training”

Arrange training by experts for all director candidates, and continuing education for all board members

Provide “orientation” for all new board members

Disclose what was actually done. Require a report at the AGM

Disclose the training-related and similar credentials (or lack thereof) for all board candidates listed on the proxy, on an individual basis

Note: Various Asian jurisdictions require some of these things, usually by means of soft law, as do most other major markets However, Japan requires none of the above

Therefore, investors should request companies to use director training by specialists, and disclose what they do

“Ask the question: what are you doing about training?”

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In Japan, Training That Fortifies Bottom-Up Expectations, Reputation-Risk Drivers Is Key

Directors who think and act as devoted fiduciaries regardless of whether they are “internal” or “external”…

…not only because they know their shareholders expect it, but because their staff do too, and so does the public. “When I enter the board room, I wear a different hat and perform a very special role”

Dialogue with investors will improve when even mid-level employees learn more about governance theory, corporate law, good board practice, and finance. “Bottom-up monitoring”

Excellent companies will educate their managers and staff in these areas

Employees need to know more about what good governance entails, so they can support it, help implement it

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Investors Can Raise the Bar

Responsible investors should encourage companies to implement training programs about finance and corporate governance, on a wider scale than at present, earlier in careers

Corporate governance will be far more effective if employees and managers understand the underlying logic and benefits of ESG for both society and company

Ask the Question: “Do your managers and directors receive seminars and training about corporate governance? Is the training comprehensive?”

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BDTI: Approved as a “Public Interest Corporation” by the Japanese Government Representative Directors / Foundation Members

Takaaki Wakasugi Emeritus Professor, Tokyo University; Professor of Economics, Tokyo Keizai University

Nicholas E. BenesPresident and Representative Director, JTP Corporation, K.K.; Governor, ACCJ; Director, Louis Golay Japan

Directors / Foundation Members

Kenichi Osugi Professor of Law, Chuo University Law School

Yoshio Omori Executive Managing Director, Japan Corporate Auditors Association

Auditor / Foundation Member

Sachiko Ichikawa Attorney-at-law, Tanabe & Partners

公益目的事業

（１）コーポレート・ガバナンスに関する専

門的知識の普及、及び人材育成を推進

する事業

（２）コーポレート・ガバナンスに関する調

査研究及び一般市民の啓蒙に資する事

業

BDTI’s Activities

BDTI has joined forces with UCLA Executive

Education, leading accounting and law firms to offer group programs for director training. Programs will combine governance theory and practice with leading-edge knowledge about the management issues that are the subject of oversight, such as strategy, finance, and risk management

Seminars and speaker events to introduce the

newest concepts and practices

Offers E-Learning course on Company Law and

corporate governance, for managers and employees

Spreading the faith: on-line communities in both

Japanese and English to facilitate discussion and exchanges of information, opinion, and experience

An on-line data-library: materials about corporate

governance and related management topics. Introduces ESG rankings via Thomson Reuters

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Please Get Involved !

当機構は公益法人であり、皆様からのご支援のもと成り立っています。当

機構の趣旨や目的をご理解の上、ご寄付、その他のご協力をいただける

方は、当機構事務所までお問い合わせください。

If you’d like to help us “make a difference for Japan…and the world”, please support BDTI by:

• Getting in touch at: nbenes@bdti.or.jp. We’d like to hear from you!

• Donating funds in one of various ways (tax-deductible, in the U.S. too)• Suggesting to Japanese firms that they look into our training programs• Asking companies: “How do you train executives before they sit on the board?• Advertising on our web site, or contributing services that we need• Participating in our “discussion forum” at http://bdti.or.jp/ or contributing to our data library. (Participation can be anonymous)

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