This content is from: Local Insights


Recent amendments to the Audit Special Exceptions Law, a law relating to the Commercial Code, provide an alternative to Japan's existing corporate governance structure. The new governance structure, scheduled to take effect in April 2003, is not mandatory and only applies to companies categorized as "larger companies" which satisfy certain criteria.

The purposes of the new governance structure is to (i) strengthen the monitoring and evaluating mandate of the board of directors by establishing committees and appointing outside directors and (ii) expedite corporate decision-making by creating statutory officers authorized to approve certain matters. The object of the amendment is to create a two-tiered management system where the board of directors focuses on evaluating management, while the implementation of corporate strategy is delegated to statutory officers.

Within Japan's existing governance structure, a representative director executes the company's business operations, a board of directors determines the company's strategy and supervises directors' performance and the corporate auditors audit directors' performance.

The new governance structure abolishes the positions of representative director and corporate auditor. While the board of directors will determine corporate strategy, supervise directors and statutory officers and appoint committee members and statutory officers, statutory officers will execute the business operations of the company. If authorized by the board of directors, statutory officers may approve certain matters on behalf of the company, such as selling or acquiring material assets, issuing securities and borrowing money. To carry out its enhanced supervisory role, the board of directors must appoint members of nominating, compensation and audit committees, each composed of at least three directors. At the heart of the new structure is the requirement that outside directors compose a majority of each committee. An outside director is a director who has not been a director in charge of executing the company's business operations, a statutory officer or an employee of the company, or any of its subsidiaries. Revisions to the Audit Special Exceptions Law also reduce directors' liability to some extent, as a result of the strengthened monitoring function of the board of directors.

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