I do not think that many foreign investors are familiar with a word of “Sodanyaku”. This word is becoming a hot issue regarding corporate governance. For instance, Institutional Shareholder Services (ISS) has announced that they would recommend their institutional clients to vote down on proposal of amendment of the article of incorporation (the articles hereafter) to create a position of Sodanyaku at the shareholders meeting. This new policy will be applied for shareholder meetings held in this year and beyond.

According to the president of ISS, Japan, Mr. Ishida, Sodanyaku is not a statutory position but purely a business practice so that it may be disguised as any other names without amendment of the articles. Therefore, the purpose of this policy is to send the public a message that this kind of business practice is not preferable for effective corporate governance purposes.

Sodanyaku is a prevailing business practice in which ex-senior-executives such as CEO or President take a position with such a name and virtually influences decision makings by the incumbent management even after they stepped down from top executive positions. In most cases, they enjoy generous perks such as an office, a secretary, a chauffeur car as well as quite decent remuneration.

Given such, what adverse effects does this practice bring to management of the company? The forth meeting of the Study Group for Corporate Governance System sponsored by the Ministry of Economy, Trade and Industry (METI), for which Mr. Ishida is one of the members, describes them as follows:

 It makes the incumbent CEO or President difficult to veer the course of business strategy which has been set by the ex-executives (Sodanyaku). It might lead the management to delay a decision on divestment from unprofitable businesses.

• From a macro point of view, this practice tends to retain management experts in the company so that those human resources tend to be unavailable for independent directors for other companies.
• There is less disclosure and accountability for Sodanyaku regarding the number of Sodanyaku, the costs and the functions.
• Sodanyaku without a position of directorship is a concern because they are not disclosed to the public.
• There are many other names. In short, it is a problem that ex-executives hold influence over the management without accountability to the public.

A typical example of adverse effects on the management is the Toshiba’s scandal. In the situation where a couple of ex-presidents were in battle over several management issues, it was the major concern for the management team members which Sodanyaku they should obey instead of paying more attention to the corporate strategy. After those Sodanyaku left Toshiba taking responsibility for the fraudulent accounting, Toshiba is now pushed to the edge of precipice of breakdown into pieces by the unveiled massive losses caused by the nuclear power bushiness.

On the other hand, Hitachi, Ltd., which is an invincible competitor to Toshiba, has revitalized themselves with the resolute management reform. Ex-CEO of Hitachi, Mr. Takashi Kawamura, who took a dauntless leadership for the management reform, confessed in a journal of “Gakusikaikaiho No. 290, Sept. 2016, how difficult it was for him to confront the abuses of this practice in the process of pursuing the management reform. He said that it would have been easier for him if he could scrap and build businesses depending on the circumstances but it was unbearably difficult to close a business because ex-executives, who were senior to him, were pitilessly against him, bawling, “It is out of the question that you close the business I started!” and because there were incessant pleas for continuation of the business from suppliers and the municipality where the business was located. He also said that it was regretful that Hitachi loosened its grip of the management reform every time when it faced resistance even though it started various reforms during the period of 2000 to 2003.

I could guess that Mr. Kawamura could not accomplish thoroughly what he wanted, facing defiance of ex-executives or Sodanyaku.

I think this practice called as Sodanyaku derives from the deep root of the culture of Japanese companies which affects many other issues regarding corporate governance of Japanese companies. I will follow up them one by one from now on.

By Masatoshi Yasuda