JAPANESE LAW UPDATE #2: Women in the Japanese Boardroom in the Era of ESG

On March 16, 2021, Japan’s Gender Equality Bureau published its annual brochure that lists the top 3 major companies whose share of women among the board members is the highest in each industry. Titled “Indicators of Women’s Empowerment is Playing a Greater Role in ESG Investing,” this year’s brochure emphasized the economic importance of Women’s Empowerment Principles. It indicated that boards of directors with a larger share of female directors receive better reactions from the market. It also highlighted that the proxy voting guidelines of Glass Lewis, AXA Investment Managers, and Goldman Sachs Asset Management, recommended voting against directors of corporate boards that do not have any incumbent or proposed female members.

As of 2020, the share of women among board members in Japanese listed companies was only 6.2%. Japan ranked 121st out of 153 countries in terms of gender parity in the World Economic Forum’s Global Gender Gap Report 2020. Nevertheless, the Japanese government has recently introduced some changes to the status quo. Below are a couple of examples that showcase recent legal developments in corporate governance in Japan.

1. Improving Diversity on Corporate Boards

The latest reform of the Companies Act of Japan (the “Act”) requires Japanese listed companies to have at least one Outside Director. These directors have an independent status, and they are not supposed to have close ties with the company. The reform came into force in March 2021. This new rule applies to listed companies that have a board of corporate auditors, which is the most common form of corporate governance in Japan.

This requirement is in line with the requirement by the revised Corporate Governance Code of Japan (the “Code”) that the Tokyo Stock Exchange published in 2018. Since the Code is highly influential among listed companies in Japan, most listed companies had already appointed Outside Directors on their boards since then. Therefore, the immediate impact of the reform of the Act is limited. Nonetheless, this requirement by the Code and the Act is an important step towards creating more diverse boardrooms in Japan.

The reason is as follows. The members of the board of directors in Japan are composed of Inside Directors and Outside Directors. In practice, the majority of directors of a board are Inside Directors, who are promoted from among the employees of the company. Since there have not been many women employees in management positions so far, most women on boards in Japan have been appointed as Outside Directors, especially from the ranks of accountants and lawyers. Therefore, this requirement to appoint Outside Directors under the Code and the Act has increased pressure on many companies to appoint their first female member on their board as an Outside Director. Once a company acquires some experience in having a female director on board, it may not take so long to add a female Inside Director.

 2. Improving Diversity at the Workplace

How about diversity in the workplace? The reform of the Act on Promotion of Women's Participation and Advancement in the Workplace came into force in 2019. The reform requires companies with more than 300 employees to create action plans to promote women’s participation in the workplace, and to publish an annual report on the progress that they have made on the plan as a disclosure requirement. Although the violation of this requirement will not lead to a criminal penalty, most companies tend to voluntarily comply with the requirement in order to avoid a negative impact on their reputation.

The Code by the Tokyo Stock Exchange also includes a Principle on diversity in the workplace. Principle 2-4 of the Code requires listed companies to engage in women’s empowerment at the workplace as part of the measures to improve their diversity.

This approach is a strategy to increase diversity at the workplace in Japan through a combination of both soft and hard law.

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Author

Yoshie Midorikawa, Partner
Yoshie Midorikawa has extensive experience in complex disputes and arbitration under the rules of the ICC, SIAC, UNCITRAL, LCIA, and ICSID. Having worked with leading law firms in Japan and Singapore, she has handled parallel proceedings across multiple jurisdictions as well as domestic disputes before Japanese courts. Through learning in the United States, practicing in Singapore, and serving on an international law firm’s arbitration team, among other accomplishments, she has developed expertise operating in diverse international environments. She has also served as a board member of listed companies in Japan, improving their corporate governance. Her deep understanding of the civil law system, her working experience in international environments, including common law jurisdictions, and her knowledge of business, enable her to bring practical and nuanced legal solutions to international commercial disputes. She is listed among “Best Lawyers in Japan 2021(Litigation)” by Best Lawyers.