The modest level and differing structure of compensation Japanese corporate executives receive has sparked recent interest in the determinants of executive pay in Japan. One factor that remains unexamined is the role played by Article 361 of the Companies Act which requires that director pay be set by the general shareholders’ meeting. To explore the question of whether this rule, by giving shareholders a veto over changes to compensation they disagree with, matters to pay in Japan, this article examines the results of the shareholders’ meetings of companies listed on the First Section of the Tokyo Stock Exchange that voted on compensation resolutions in 2014. We find that, while all resolutions were approved, there was significant variation in both what pay directors asked for and how shareholders responded that was correlated with differences in each. The results are consistent with the view that the relevance of the rule varies depending on the context of the company. While at most companies, shareholder voting on pay is relatively uncontroversial, the changing structure of ownership and governance at some provides an avenue through which the rule may now matter to pay.
Assistant Professor, Graduate School of Law, Nagoya University, Japan.
Associate Professor, Graduate School of Law, Nagoya University, Japan.
1. See eg Bebchuk, Lucien and Fried, Jesse, Pay Without Performance: The Unfilled Promise of Executive Compensation (Harvard University Press 2004) 15 .
2. Jackson, Robert J Jr and Milhaupt, Curtis J, ‘Corporate Governance and Executive Compensation: Evidence from Japan’ (2014) Columbia Business Law Review 111, 155 .
3. Nakazato, Minoru et al, ‘Executive Compensation in Japan: Estimating Levels and Determinants from Tax Records’ (2011) 20 Journal of Economics and Management Strategy 843 .
4. Olcott, George, ‘Whose Company Is It? Changing CEO Ideology in Japan’ in D Hugh Whittaker and Simon Deakin (eds), Corporate Governance and Managerial Reform in Japan (OUP 2009) 192 . See also Salazar, Alberto R and Raggiunti, John, ‘Why Does Executive Greed Prevail in the United States and Canada but not Japan? The Pattern of Low CEO Pay and High Worker Welfare in Japanese Corporations’ (2016) 64 American Journal of Comparative Law 721 .
5. Jackson and Milhaupt (n 2).
6. Kaisha-hō [Companies Act], Act 86 of 26 July 2005.
7. The term ‘Say on Pay’ encompasses a diverse set of rules across jurisdictions. We use the term here merely for ease of reference rather than to take a position on what constitutes a ‘say on pay’ rule. See Thomas, Randall S and Van der Elst, Christoph, ‘Say on Pay Around the World’ (2015) 92 Washington University Law Review 653 .
8. The rule requires approval of pay limits for the entire board rather than for individual directors. See Part III for further detail.
9. Except for auditors (kansayaku), whose pay is subject to essentially the same process under art 387 of the Companies Act.
10. Araki, Takashi, ‘Changes in Japan’s Practice-Dependent Stakeholder Model and Employee-Centred Corporate Governance’ in D Hugh Whittaker and Simon Deakin (eds), Corporate Governance and Managerial Reform in Japan (OUP 2009) 223–226 .
11. Less than 2% of companies listed on the Tokyo Stock Exchange have adopted the company with committees system that includes the executive officer position.
12. In 2010 the Dodd-Frank Act introduced a form of ‘say on pay’ rule, but unlike the Japanese rule it gives shareholders an advisory rather than a binding vote on pay.
13. For an early judicial statement to this effect, see Ōsaka Chihō Saibansho [Osaka District Court] Judgment 29 June 1953, 34 Hanrei TAIMUZU 63.
14. Jackson and Milhaupt (n 2) 156 (raising the question of whether shareholders may use the J-SOP rules to express reservations about director pay).
15. Kato, Takao, ‘Chief Executive Compensation and Corporate Groups in Japan: New Evidence from Micro Data’ (1997) 15 International Journal of Industrial Organization 455 .
16. Kubo, Katsuyuki, ‘The Determinants of Executive Compensation in Japan and the UK: Agency Hypothesis or Joint Determination Hypothesis?’ in Joseph P H Fan et al (eds), Designing Financial Systems in East Asia and Japan (Routledge 2003).
17. Morck, Randall K and Nakamura, Masao, ‘A Frog in a Well Knows Nothing of the Ocean: A History of Corporate Ownership in Japan’ in Randall K Morck (ed), A History of Corporate Governance Around the World (University of Chicago Press 2007).
18. On the role of employees see Pejovic, Caslav, ‘Changes in Long-term Employment and Their Impact on the Japanese Economic Model: Challenges and Dilemmas’ (2014) 37 Journal of Japanese Law 51 ; Araki (n 10); on that of the main bank system see generally Arikawa, Yasuhiro and Miyajima, Hideaki, ‘Relationship Banking in Post-Bubble Japan: Coexistence of Soft- and Hard-Budget Constraints’ in Masahiko Aoki et al (eds), Corporate Governance in Japan: Institutional Change and Organizational Diversity (OUP 2007).
19. By market value of shareholding, foreigners owned 4.7% of shares of companies listed on the TSX in 1990. By 2015, that figure was 29.8%. These, and trust banks, largely displaced domestic financial institutions and business companies: Tokyo Stock Exchange, ‘2015 Shareownership Survey’ (Tokyo Stock Exchange 2016), 3 <www.jpx.co.jp/english/markets/statistics-equities/examination/b5b4pj00000154dp-att/e-bunpu2015.pdf> accessed 24 November 2017.
20. See particularly Salazar and Raggiunti (n 4).
21. Jackson and Milhaupt (n 2).
22. Olcott (n 4).
23. See generally Kato, Takao and Rockel, Mark, ‘Experiences, Credentials, and Compensation in the Japanese and U.S. Managerial Labor Markets: Evidence from New Micro Data’ (1992) 6 Journal of the Japanese and International Economies 30 ; Kubo (n 16).
24. Jackson and Milhaupt (n 2); Salazar and Raggiunti (n 4).
25. Kato and Rockel (n 23); Nakazato et al (n 3).
26. Kubo (n 16).
27. Jackson and Milhaupt (n 2).
28. ibid. This rule may act as a psychological limit keeping pay below that threshold, though as this study finds average director pay remains far below it.
29. Kubo (n 16).
31. Araki (n 10).
32. Kato (n 15).
33. Aoki, Masahiko and Patrick, Hugh, ‘The Japanese Main Bank System: An Introductory Overview’ in Masahiko Aoki and Hugh Patrick (eds), The Japanese Main Bank System: Its Relevance for Developing and Transforming Economies (OUP 1995).
34. Kato (n 32).
35. In the early 2000s there was discussion over whether Japan was converging on a shareholder primacy model of corporate governance, see Puchniak, Dan W, ‘The Japanization of American Corporate Governance? Evidence of the Never-Ending History for Corporate Law’ (2007) 9 Asian-Pacific Law & Policy Journal 7 . The general view is that this has not happened, but certain elements of the system have changed which at least indicate an increased formal role for shareholder participation. See generally Buchanan, John, Chai, Dominic Heesang and Deakin, Simon, Hedge Fund Activism in Japan: The Limits of Shareholder Primacy (CUP 2012).
36. Pejovic (n 18).
37. Approximately two-thirds of companies on the Tokyo Stock Exchange in 2014 had appointed at least one outside director: Tokyo Stock Exchange, ‘TSE-Listed Companies White Paper on Corporate Governance 2015’ (Tokyo Stock Exchange 2015), 21 <www.jpx.co.jp/english/equities/listing/cg/tvdivq0000008jb0-att/2015.pdf> accessed 23 November 2017.
38. Horiuchi, Akiyoshi, ‘The Big Bang: Idea and Reality’ in Takeo Hoshi and Hugh Patrick (eds), Crisis and Change in the Japanese Financial System (Kluwer Academic Publishers 2000) 233 .
39. This was particularly the focus of reforms in the late 1990s. On these, see Kanda, Hideki, ‘Japan’s Financial Big Bang: Its Impact on the Legal System and Corporate Governance’ in Takeo Hoshi and Hugh Patrick (eds), Crisis and Change in the Japanese Financial System (Kluwer Academic Publishers 2000) 277.
40. Gilson, Ronald J and Milhaupt, Curtis J, ‘Choice as Regulatory Reform: The Case of Japanese Corporate Governance’ (2005) 53 American Journal of Comparative Law 343 .
41. Olcott (n 4).
42. The importance of social norms is discussed in most recent works touching upon executive compensation in Japan. See Olcott (n 4); Salazar and Raggiunti (n 4); Jackson and Milhaupt (n 2).
43. Jackson and Milhaupt (n 2).
44. Nakada, Toshiaki and Witty, Thomas, ‘New Rules on Corporate Governance in Japan’ (2015) 39 Journal of Japanese Law 199 .
45. The position of auditor, kansayaku, which is the distinctive feature of Companies with Auditors was introduced in the first Commercial Code [Shōhō [Commercial Code], Act No 48 of 9 March 1899], arts 180–189. For a brief introduction to the history of kansayaku in English, see Charles Lee and Jamie Allen, ‘The Roles and Function of Kansayaku Boards Compared to Audit Committees’ (Asian Corporate Governance Association, 2013), 5 <www.acga-asia.org/upload/files/advocacy/20170330102329_21.pdf> (accessed 20 November 2017).
46. On the tension between these functions, see Aronson, Bruce E, ‘The Olympus Scandal and Corporate Governance Reform: Can Japan Find a Middle Ground between the Board Monitoring Model and Management Model?’ (2013) 35 Journal of Japanese Law 85 .
47. There have been attempts to amend the Act to require at least one outside director per company. The Tokyo Stock Exchange listing rules require companies to have at least one independent officer, though this can be fulfilled by having an independent auditor.
48. Gilson and Milhaupt (n 40).
49. Kozuka, Souichirou, ‘Reform After a Decade of the Companies Act: Why, How and to Where?’ (2014) 37 Journal of Japanese Law 47 .
50. Tokyo Stock Exchange, ‘TSE-Listed Companies White Paper on Corporate Governance 2015’ (n 37) 15.
51. Jackson and Milhaupt (n 2).
52. Attorney General’s Office (trs), The Commercial Code of Japan (Japan Trade Guide Pub Co 1951) 50 .
53. On the creation of the Companies Act see generally Nakamura, Nobuo, ‘The Revision of Japanese Company Law and its Modernisation’ (2006) 24 Waseda Bulletin of Comparative Law 1 .
54. The version of art 361 in force at the time of the resolutions in this study (2014) stated:
(1) The following matters with respect to the financial benefits received from a Stock Company as a consideration for the execution of the duties, such as remunerations and bonuses, (hereinafter in this Chapter referred to as “Remunerations”) of directors shall be fixed by resolution of a shareholders meeting if such matters are not prescribed in the articles of incorporation:
(i) For Remunerations in a fixed amount, that amount;
(ii) For Remunerations the amount of which is not fixed, the specific method for calculating that amount;
(iii) For Remunerations that are not monetary, the specific contents thereof.
(2) Directors who prescribed the matters listed in item (ii) or item (iii) of the preceding paragraph, or who submitted a proposal to amend these matters to a shareholders meeting shall explain the reasons why such matters are reasonable at such shareholders meeting.
55. See generally Thomas and Van der Elst (n 7).
56. Saikō Saibansho [Supreme Court] 3rd Petty Bench Judgment 26 March 1985, 557 Hanrei TAIMUZU 124.
58. Keikyu Corporation, which held a vote on director compensation limits in 2014 (included in our study), had gone 32 years without raising the board’s pay.
59. A ‘mandatary’ is roughly the civil law equivalent of an agent in common law.
60. Ōsaka Kōtō Saibansho [Osaka High Court] Judgment 13 May 1964, 10-7 Shōmu Geppō 1025.
61. Ōsaka Chihō Saibansho [Osaka District Court] Judgment 19 March 1971, 266 Hanrei TAIMUZU 262.
62. See eg Kyōto Chihō Saibansho [Kyoto District Court] Judgment 16 January 1969, 232 Hanrei TAIMUZU 164.
63. Kyoto District Court Judgment 7 June 1990, 746 Hanrei TAIMUZU 196.
64. Supreme Court 2nd Petty Bench Judgment 18 December 1992, 818 Hanrei TAIMUZU 94.
65. See eg Tōkyō Chihō Saibansho [Tokyo District Court] Judgment 5 August 2005, Westlaw Japan 2005WLJPCA08050002; Tōkyō Kōtō Saibansho [Tokyo High Court] Judgment 30 October 2008, Westlaw Japan 2008WLJPCA10306009; Tokyo District Court Judgment 10 March 2009, Westlaw Japan 2009WLJPCA03108004.
66. Kaisha-hō Shikō Kisoku [Ordinance for Enforcement of the Companies Act], Ordinance of the Ministry of Justice No 12 of 7 February 2006.
67. Osaka District Court Judgment 9 April 1980, 417 Hanrei TAIMUZU 152.
68. See eg Tokyo District Court Judgment 28 January 1988, 658 Hanrei TAIMUZU 52; Kyoto District Court Judgment 25 August 1989, 1337 Hanrei Jihō 133; Nara Chihō Saibansho [Nara District Court] Judgment 29 March 2000, 1029 Hanrei TAIMUZU 299. Art 361(2) of the Companies Act 2005 now further requires that when directors are requesting a form of compensation that is not in a fixed amount or which is not monetary, the reasons why such compensation is reasonable should be disclosed at the shareholders meeting.
69. Art 82 of the Ordinance for the Enforcement of the Companies Act, which governs the content of remuneration proposals, does not explicitly state that bonuses must be approved separately from base pay. However, from the large number of bonus resolutions considered independently of base pay which are included in our study, it seems that the general practice is to have separate votes for the two types of remuneration.
70. Forty of the companies in our sample introduced retirement bonus cash outs in 2014.
71. This is also mentioned in Olcott (n 4).
72. Ordinance for the Enforcement of the Companies Act, art 82(2).
73. Companies Act 2005, art 236.
74. Companies Act 2005, art 238(1).
75. Companies Act 2005, art 240.
76. Nakazato et al (n 3).
77. See eg Kaplan, Steven N and Minton, Bernadette A, ‘Appointments of Outsiders to Japanese Boards: Determinants and Implications for Managers’ (1994) 36 Journal of Financial Economics 225 .
78. ‘EDINET: Electronic Disclosure for Investors NETwork’ (Financial Services Agency) <http://disclosure.edinet-fsa.go.jp/EKW0EZ1001.html?lgKbn=1&dflg=0&iflg=0> accessed 6 March 2017.
79. Corporate auditors (kansayaku) are viewed as ineffective since they do not have voting power on the board nor the ability to fire: Aronson, Bruce E, ‘Japanese Corporate Governance Reform: A Comparative Perspective’ (2015) 11 Hastings Business Law Journal 85, 98–102 .
80. More specifically, information on each company’s proportion of foreign shareholders and numbers of outside directors were obtained from the results of their Tokyo Stock Exchange Corporate Governance Information Reports as of the end of 2014: Japan Exchange Group, ‘Corporate Governance Information Search’ <www.jpx.co.jp/english/listing/cg-search/index.html> accessed 6 March 2017. Information on each company’s Return on Assets (ROA) and Return on Equity (ROE) in the previous year were obtained from their Worldscope Company Reports. Shareholder prospectuses were consulted for additional details on the content of resolutions where such were not contained in the reports obtained from EDINET. The TOPIX Index ranking was used as a proxy for company size.
81. See generally Buchanan, Chai and Deakin (n 35).
82. One example illustrating this is found in a case from the Osaka High Court in which the general meeting of a scandal tainted company descended into chaos as shareholders, including some corporate extortionists, violently protested a ‘say on pay’ proposal approving a retirement bonus for a director implicated in the scandal. Osaka High Court Judgment 26 September 1967, 213 Hanrei TAIMUZU 119.
83. See eg Tokyo District Court Judgment 27 June 2003, Westlaw Japan 2003WLJPCA06270007; Tokyo District Court Judgment 27 September 2002, Westlaw Japan 2002WLJPCA09270011.
* Assistant Professor, Graduate School of Law, Nagoya University, Japan.
† Associate Professor, Graduate School of Law, Nagoya University, Japan.
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