Corporate governance is improving in Japan. More and more companies bring on board independent directors, engage the host of foreign investors and other small shareholders.

But, there is still some way to go.

According to a Heidrick & Struggles study, only 73 listed companies out of the thousands in Japan have a committee-style board in the true supervisory sense. Independent directors, relied on by minority shareholders to defend their rights, are far and few between.

 “The issue of Japan’s corporate governance has been left untouched for a long time,” says Hiroaki Niihara, the Ministry of Economy, Trade and Industry’s corporate systems division director.

“Our major goal is to come up with a framework that would protect minority shareholders of listed companies, where Japan has been very weak,” he adds.

A common view among Japanese executives interviewed by Heidrick & Struggles is that good governance does not equal good management. They say it does not make sense simply to increase the number of independent directors without proper training.

Furthermore, the executives want a clear definition of “independence”. They also question the extra cost in terms of salary and the time that needs to be taken to keep the independent directors informed about the company’s performance.

Historically, Japanese boards have been made up of directors who have grown up in the company. The advantage is that they understand the business. The disadvantage is that they may not understand the competitive landscape. Where the director is external or “independent”, they have tended to be either banks brought in to protect their interests in troubled times, or the ama-kudari (literally “coming down from heaven”) public servants including former ambassadors, lawyers or literary figures who may have great experience, but not necessarily good business expertise. 

But, one thing is for sure, if Japanese companies want to attract more investors, especially from their own retail investors, they need to be more transparent, more accountable and more progressive.

There are already some existing forces at play that can possibly help drive better corporate governance standards in Japan.  

First, there is a growing interest among older Japanese to invest in equities. Their hefty savings – otherwise left swirling, under-utilized, in the banking and postal savings systems – can be used to boost company share prices if invested. But, in return, these retail investors are asking for better understanding on the business plans and strategies of the companies.

Next, there is a force from within.

“Company management has largely been carried out in a black box. You have had factions within the company that are beholden to the leader and if you want to get ahead, you owe your allegiance to the president of the corporation,” says former DHL Express Japan president Guenter Zorn.

Zorn says there is little in the way of succession planning in Japan. “The top person chooses the successor and the board signs off. This concentrates power in the hands of the president or chief executive.

“Governance will improve dramatically if the next generation of leaders has a chance to go abroad for a while to see what others are doing,” Zorn says. “These aware and successful executives will embrace both transparency of the management structure and independence of directors as ways of driving greater corporate success.” He says the danger is that the new generation of managers will grow up in the same spirit of their conservative bosses, limited by the internal power factions fairly common in Japanese companies.

“But a more dynamic and transparent corporate governance could really harness Japan’s innovative power and exploit the market much more than it has done to date.”

Zorn disagrees with the “lost decade” argument that says Japan has stagnated for 10 years from the 1990s into the 21st century. “The average growth during this period was about 1.7 per cent - certainly not great compared to China or Vietnam, but my home country, Germany, didn’t do much better and yet no one talks about a lost decade in Germany.”

He says Japan is leading the world in many technological fields. For example, Japan is the clear leader in battery technology which will power the electric cars of the future and is also the global leader in robotics which has transformed manufacturing and will equally shape the consumer’s life from healthcare to leisure activities. With a change in governance and changes to some of the more conservative management approaches that often stifle innovation, Japan has all the potential to continue leading the Asia Pacific region if not in absolute economic size but in value created.

Many Japanese executives, especially the younger, western-educated ones, have a growing desire for better transparency around the management of the companies that they work for. They want to know what their career prospects are and what lies in store for them.

“These aware and successful executives will embrace both transparency of the management structure and independence of directors as ways of driving greater corporate success,” says Zorn.

Perhaps, most importantly, having good corporate governance will unleash and amplify Japan’s economic power in the global market place, create more value for everyone and regain some of its lost luster.