Tokyo Stock Exchange:  2587              Meeting Date: 3/27/2015

Suntory Beverage & Food Limited is one of the first Japanese companies to seek shareholder approval to shift from a two-tier board to a one-tier board with one committee (specifically, the board of directors and an audit committee), which is a newly introduced board structure under the 2015 amended Companies Act. While this may appear to be somewhat of a technical change regarding public company board structures, 25 companies have already announced an intention to switch to this board structure, making this a trend that investors should keep an eye on.Will more companies follow suit? And why?

The conventional board structure for Japanese companies is a two-tier board structure, comprised of the board of directors and the board of statutory auditors. Under the current law, Japanese companies are allowed to adopt and establish either the above-mentioned two-tier board structure, or a one-tier board with three committees. The board of directors of a two-tier board is generally dominated by insiders as the law only requires the appointment of two external statutory auditors but no stipulation regarding outside directors. The lack of board independence has long been criticized by non-Japanese investors.

Amid pressure from investors, the 2015 Companies Act finally implemented measures to encourage companies to appoint at least one outside director (on a comply or explain basis) as well as introduced the aforementioned new board structure for public companies (one-tier board with one committee). At first, rumors suggested there would not be any significant adoption of this new board structure; however, since the Corporate Governance Code (“Code”), which will take effect on June 1, 2015, includes a principle that recommends companies appoint at least two independent outside directors, many Japanese companies with two-tier board structures have been considering shifting to the one-tier board with one committee structure. Optimistically, the primary reason for the change in board structure is to improve the corporate governance framework, thereby increasing management transparency. However, there may be other ulterior motives as to the shift. After June 1, 2015, companies with the two-tier board structure will be required to appoint at least four outside members: two outside directors are encouraged by the Code and two external statutory auditors are required by the Companies Act. If a company shifts to the one-tier board with one committee structure, however, it will need to secure only two outside directors. Additionally, as opposed to the sub-committee structures under the one-tier board with three committees, this new board structure requires the establishment of only the audit committee. Consequently, adopting the new board structure requires securing comparably fewer outside members than for two-tier boards; unfortunately, this may be a primary factor in Japanese companies electing to shift to the new board structure.

The good news is that we anticipate that there will be more outside directors on Japanese boards of directors for the 2015 proxy season. Regardless of what board structure a company ultimately chooses, it is important for public companies to maintain sufficient board independence through the appointment of multiple, truly independent directors.

Companies that Have Announced an Intention to Shift to One-Tier w/ One Committee



SVENKSA HANDELSBANKEN (see Proxy Season Insider here)
OMX Stockholm Exchange:  SHB-A          Meeting Date: 3/25/2015

OMX Stockholm Exchange:  FABG          Meeting Date: 3/26/2015

TURKCELL (see Proxy Season Insider here)
Istanbul Stock Exchange:  TCELL         Meeting Date: 3/26/2015

Bolsa de Madrid:  SAN          Meeting Date: 3/27/2015

OMX Stockholm Exchange:  ORES          Meeting Date: 3/27/2015

Tokyo Stock Exchange:  7751          Meeting Date: 3/27/2015