On March 6th, Toyota Motor Corp. (TYO: 7203) announced that it would nominate three outside directors to its board. What was equally significant was the move to appoint a foreigner to its board as there is currently a dearth of talented overseas executives on Japanese boards.
Toyota, along with Canon Inc., whose senior executives serve as ranking members at the Keidanren, the Japan Business Federation, were the most well-known blue chip companies that long held out on introducing outside directors to their boards. As readers of Glass Lewis blog would remember, the Keidaren is an influential business lobbying group which has fiercely opposed the appointment of outside directors. In fact, it was speculated that the Keidaren was the primary reason why the Democratic Party of Japan, the former political ruling party, gave up on the idea of adding a provision to appoint outside directors when revising the Company’s Act.
Typically, Japanese companies that have a high percentage of foreign share ownership have tended to also have higher percentage of outside directors. However, Toyota and Canon have not followed, and for years continued to run their respective companies without appointing any outside directors. Until this surprising announcement from Toyota.
In separate news, it was announced that the new political party, the Liberal Democratic Party, had postponed addressing the appointment of several independent directors at the coming diet session. The appointment of more than one independent director was something that LDP ran on last year. While this news comes as a disappointment amidst Toyota’s welcoming development, it is unclear whether this suggests Japan is moving backwards on the corporate governance front. Case in point: Japanese boards were notorious for having board membership that exceeded 20. Toyota, itself had 27 executives serving on the board as recently as 2010. However, in 2011, it reduced the board size to 11. Following this, Glass Lewis saw a clear trend toward companies slimming down the size of their corporate boards.
While it is commonly understood that Japanese companies are slow to change unless forced upon by lawmakers and regulators, not shareholders, they are notoriously watchful of activities of other companies. Therefore, shareholders wishing to engage with the management should just point out what their peer companies are doing. No one wants to be ahead of others but no one wants to be left behind. Now that Toyota, the most well-known company in Japan, finally compromised on embracing outside directors, there is no reason why others can’t follow Toyota’s lead.
Next possible move: Canon introduces outside directors, which could mark the sad concession of the Keidaren on the issue of appointing outside directors. Wishful thinking?