Outside directors: Do you really want the job?

Many foreign executives in Japan have woken up to the fact that lucrative outside directorships at prestigious Japanese companies are now increasingly on offer. Such outside directorships provide wonderful opportunities for gaining insight into how Japanese companies work, networking with senior players, and generally having an invaluable window on Japanese working and social practices.

These changes are being driven by the new Japanese corporate governance code, which now mandates two outside directors on each board. Previously, these outside directors were optional.

Outside directorships in Japan pay less well than in the U.S., but about as well as in the UK. A ballpark figure might be ¥10 million, which is not bad for attending a monthly meeting or two.

Another advantage of outside directorships is that they can offer a haven if you have lost your job. Some executives join the boards of what were previously client companies, and use the cash and the contacts to bridge the transition to a different role.

All these factors had come to the notice of several Delphi Network members, who asked me to arrange an event on the topic. We invited several experts along, who gave us a much more realistic view of what the role entails.

An outside directorship at a company doing well is one thing. But as soon as your company starts under-performing, the workload can increase sharply. Worst of all, your company could be involved in a scandal, at which point it is possible that bailing out the company becomes almost a full-time job for an outside director.

Scandals are not unlikely at listed Japanese companies, partly because the concept of checks-and-balances is relatively foreign. As the famous Olympus scandal in 2011 shows, slavish loyalty to powerful leaders can lead to problems. Outside directors may exist, but might be too deferential to the individual who picked them, and without the required technical knowledge. The statutory auditor — theoretically a powerful player in Japanese companies — may, in fact, be helpless because it is not legally mandatory for him to have any legal or accounting knowledge.

The next thing is training. Outside directors need to understand the precise role of an outside director, and how they add value. They need to understand at least basic legal and financial constructs, as well as have an in-depth understanding of the industry. They need a sophisticated worldview, which they can share with inward-looking company directors, for example, in terms of how things work globally — as opposed to just in Japan, or being alert to a sea-change in global regulatory regimes.

There are two further things. First, they need to be able to overcome the way Japanese companies view outsiders. They will have been hired, in many cases, simply to allow the company to tick compliance and regulatory boxes. At Olympus, one of the outside directors was a medical doctor without any true understanding of the company’s business. So the outside director needs to become an insider to a certain degree, at least to the extent of being able to get crucial information, which inside directors may wish to keep away from them.

Second, they need to understand their responsibilities to shareholders, who are the ones who appoint them, and to whom they are theoretically responsible. However, this relationship should not be one of unquestioning obedience. Despite being owners, shareholders have a moral and practical responsibility to other stakeholders, especially in Japan. Further, some shareholders are predatory mischief-mongers. Hedge funds are famous for putting fierce pressure on both inside and outside directors to achieve an outcome that may only be good for the funds.

Most important, an outside director needs to have character, in the old-fashioned sense of the word. They need the guts to stand up to predatory shareholders and to crooked insiders. They need perseverance and an appetite for hard work. They need to be able to cope with a steep learning curve, and they need to be able to want to make a difference — to make the company, and the corporate world, generally a better place. Their role is essentially one of a guardian of corporate ethics. Corporate ethics are much tarnished globally, so this makes the role of the outside director all the more essential.

© Japan Today