Corporate Boards in Europe and Japan: Convergence and Divergence in Transition

This paper clarifies the current convergence and divergence of corporate boards in Europe and Japan. To this end, it offers an overview of the legal settings governing boards in Japan in transition. Japan introduced the Stewardship Code and a third board structure as an option in the Companies Act in 2014 and the Corporate Governance Code in 2015. These recent amendments focus both on shareholders’ governance mechanisms through institutional investors and on outside directors within companies. Some converged elements appeared on corporate boards in Europe and Japan even though significant divergences are observed because of historical developments specific to Japan. These convergences and divergences remain to be discussed and clarified upon further amendment.


Convergence and Divergence in Europe: The Role of the Board
Internal governance and the functioning of boards are central to modern corporate law and governance. In recent years, research on these issues has developed. Major jurisdictions in Europe have been compared and convergences and divergences on corporate boards have been clarified. 1 In this research, the overall conclusion clearly supported the proposition that shareholder decision making is inefficient for core managerial decisions. 2 This article provides an overview of the situation in Japan and clarifies convergence and divergence between Europe and Japan with a particular focus on recent significant amendments and aspects characterising corporate boards in listed companies. 3

Historical Overview and Recent Changes in Japan
Historically, Japan's company law was a mixture of elements adopted from Germany and the US. It has been part of the country's Commercial Code (shōhō), which was enacted in 1899 and of German origin. The Code was amended in 1950 4 with the introduction of elements from the US system and consolidated into the Companies Act (kaishahō, hereinafter, 'CA') in 2005 (effective from May 2006). 5 Until 2002, only 'two-board companies' (kansayakukai secchi gaisha) were allowed for listed companies in Japan. 6 This board structure and the German supervisory board (Aufsichtsrat) differ significantly. 7 'One-board and three-committee companies' (now referred to as shimei iinkaitō secchi gaisha) were introduced as a second board structure in the amendment to the Commercial Code in 2002 after studying the one-tier boards in the US. 8 However, this involved a fundamental change in the history of Japan's company law, and companies have rarely adopted this structure. 9 With the 2014 amendment to the CA, 'one-board and one-committee companies' (kansatō iinkai secchi gaisha) were introduced as a third option. 10 More recently, in February 2014, Japan introduced the 'Principles for Responsible Institutional Investors' (hereinafter, 'Stewardship Code') 11 as the first such code in Japan after the example of the UK. The amendment of the CA in June 2014 (effective from May 2015) recommended one outside director. 12 Next, in March 2015 (effective from June 2015), two independent outside directors were recommended for listed companies in Sections 1 and 2 of the Tokyo Stock Exchange (hereinafter, 'TSE') under Japan's Corporate Governance Code (hereinafter, 'CG Code') 13 on a 'comply or explain' basis. 14 The Stewardship Code and the CG Code were revised in May 2017 andin June 2018, respectively. 15 In the late 1990s, many actors, including cross-holding shareholders, banks, and employees, were said to be functioning as corporate governance mechanisms, and as a result, it was unclear which actor was the most influential. 16 Recent amendments have focused on both shareholders' governance mechanisms through institutional investors and outside directors within companies. 17

Available Board Structure
In Europe, there are two models for a board structure: the one-tier structure used in the UK 18 and the two-tier structure in Germany. 19 In France, individual companies are allowed to select their board structure from one-tier and two-tier systems. 20 The European Company (Societas Europaea, hereinafter 'SE') Statute also offers this option in Europe. 21 However, it is pointed out that the distinction between one-tier and two-tier boards has little impact on performing a monitoring function. 22 13 The CG Code is available at the Japan Exchange Group (hereinafter, 'JPX') website (https ://www.jpx. co.jp/engli sh/equit ies/listi ng/cg/tvdiv q0000 008jd y-att/b7gje 60000 029gf h.pdf). See infra n. 15. 14 Principle 4.8 of the CG Code. Traditionally, independent and/or outside directors have not been popular in Japan. Before the CG Code, at least one independent outside director or independent outside statutory auditor has been required by Rule 436-2 of the TSE's 'Securities Listing Regulations' since 2009. See Kanda (2018), pp 179-180. 15 The Council of Experts on the Stewardship Code (2017). The revised CG Code is available at the JPX website (https ://www.jpx.co.jp/engli sh/equit ies/listi ng/cg/index .html) and attached in 'Securities Listing Regulations' by the TSE and in effect (available at the JPX website: https ://www.jpx.co.jp/engli sh/rules -parti cipan ts/rules /regul ation s/index .html). The revised CG Code consists of three parts: 5 general principles, 30 principles, and 42 supplementary principles. All of these are applied to the listed companies on TSE Sections 1 and 2, and general principles are applied to all the listed companies on the TSE on a 'comply or explain' basis (Rule 436-3 of the 'Securities Listing Regulations'). Hereinafter, this article refers to the revised version of these codes. 16 See Kanda (1998) Pietrancosta et al. (2013), pp 186-187. 22 Davies et al. (2013a), pp 97-98. In Japan, individual companies are allowed to choose the best board structure from the three identified above: 'two-board companies', 'one-board and three-committee companies', and 'one-board and one-committee companies'. 23 Currently, there is a trend of former 'two-board companies' changing their board structure to 'one-board and one-committee companies '. 24 There is a similarity between Europe and Japan in that individually listed companies can choose the best board structure. The board of statutory auditors in Japan's 'two-board companies' cannot have the power to elect directors or decide on their remuneration. 25 Therefore, a two-tier board, as in Germany, would not be available in Japan. 26 Japan can be identified as a jurisdiction that has adopted a one-tier board structure. 27 One feature of Japan's company law in the current framework is that the CA provides three separate board structures and allows individual companies to select from these. In Japan, it has been said that there are expected 'competitions' among these structures stipulated in the CA. However, this is an issue that remains to be clarified. 28 23 See Sect. 1.2 above. 24 The background is as follows: 'two-board companies' have been required to adopt at least two outside statutory auditors (Art. 335(3) of the CA). Adopting at least two independent outside directors is also recommended by the CG Code, and thus 'one-board and one-committee companies' make former outside statutory auditors into independent outside directors on the 'audit & supervisory committee' to meet the recommendation. For a more detailed description of this committee, see Sect. 2.1.3 below. To change the board structure, the articles of association of the companies should be amended and approved by a shareholders' meeting (Arts. 326(2) and 466 of the CA), which is in practice typically held annually in June. For the listed companies currently on the TSE Sections 1 and 2, 'two-board companies' account for 71.8% (1876 companies), 'one-board and three-committee companies' constitute 2.4% (63 companies), and 'one-board and one-committee companies' account for 25.8% (673 companies) as of 18 July 2018. See the JPX website 'Corporate Governance Information Search' (http://www.jpx.co.jp/engli sh/listi ng/ cg-searc h/index .html). 25 Both directors and statutory auditors are elected by a resolution of the shareholders' meeting (Art. 329(1) of the CA). For remuneration, see Sect. 3.1.4 below. 26 There is no legal requirement for co-determination in Japan. However, most members of the board of directors are traditionally former employees who have been promoted internally. Understandably, this practice had been inconsistent with the concept of outside directors. See Sect. 3.2.2 below. 27 See Kanda (1997), p 186. For 'one-board and three committee companies' and 'one-board and onecommittee companies', statutory auditors cannot be adopted (Art. 327(4) of the CA) and thus a board of statutory auditors cannot be established. For 'two-board companies' and 'one-board and one-committee companies', optional committees can be established within the board of directors. See Sect. 2.1.3 below.
However, if we define the criteria separating one-tier and two-tier in terms of whether membership of the two corporate organs is separated, then it would be possible to understand Japan's 'two-board companies' as a two-tier structure (see Art. 335(2) of the CA). This determination depends on how we define 'one-tier' and 'two-tier'. The author is grateful to Professor Patrick C. Leyens for suggesting this point. 28 It is well known that there are 'state competitions' in corporate law in the US, which is motivated by the franchise fees of the state in which corporations are established. See Romano (1993). In Japan, there are competitors outside Japan, and Japan's company law rules have been influenced by overseas jurisdictions. See Kanda (2015), p 84.
There are similarities and differences regarding institutional competitions within/across the US, Europe, and Japan. Specifically, Europe and Japan are similar in that individual companies can choose the best board structure provided in domestic company acts or adopt the SE form in Europe, although individual companies in Japan have less flexibility to amend the board structure once adopted compared to one-tier boards in the UK. See infra nn. 40 and 41 and the accompanying texts.

Powers and Functions
In Europe, it is pointed out that the two board models are functionally much less different, and it may even be said that there is considerable convergence. 29 In Japan, for traditional 'two-board companies', the board of directors decides on the execution of company operations and monitors the execution of the duties by the directors simultaneously. 30 Further, it is stipulated that a 'board of directors may not delegate the decision on the execution of important operations'. 31 This can be understood as one of the traditional divergences between Europe and Japan that still prevails. 32 For 'one-board and three-committee companies', 'the decision on the execution of important operations' can be delegated to executive officers. 33 For 'one-board and onecommittee companies', decisions are made by the board in principle, but can be delegated to directors by a resolution of the board provided one of the following conditions is met: (1) the outside directors form a majority of the company's board of directors 34 or (2) the company stipulates the delegation in its articles of association. 35 For these two board structures, there can be convergence on the item of delegation to management from boards in Japan and from one-tier boards in Europe. 29 Specifically, '[f]irst, the one-tier board makes use of delegation to the management to a large degree, and monitoring the exercise of the delegated powers becomes its main task. Secondly, not only the supervisory boards but also the one-tier boards are dependent on management, sometimes to the extent that management takes over. Thirdly, in the one-tier board itself there has been a certain de facto and de iure separation, not only between executives and non-executives but also between non-independent and independent directors. And lastly, there is also a convergence in the exercise of certain functions such as strategy, risk management, and internal control.'. Davies et al. (2013a), p 11. 30 This is a general rule for 'companies with a board of directors'. It is stipulated that boards of directors shall perform the following duties: (1) deciding the execution of the operations of 'companies with a board of directors' and (2) supervising the execution of the duties by the directors (Art. 362(2) of the CA). This was stipulated by the amendment of the Commercial Code in 1981 (Act No. 74/1981). 31 Art. 362(4) of the CA. Therefore, functions of deciding executions of important operations and monitoring are not separated in Japan under this general provision. In this setting, outside directors participate in 'the decision on the execution of important operations'; in the UK, it is recommended that nonexecutive directors (hereinafter, 'NEDs') constructively challenge and help develop proposals on strategy (Financial Reporting Council 2016, Section A.4). In Germany, the supervisory board has the power to provide consent regarding the business executions of the board of directors (Art. 111(4) of German Stock Corporation Act/Aktiengesetz, hereinafter 'AktG'). In these ways, monitors have contributed to corporate businesses among these two jurisdictions. There are similarities and differences between the jurisdictions regarding monitors' participation in the creation of corporate strategies and the corporate businesses. 32 However, there is an ongoing discussion in Japan that Art. 362(4) of the CA should be amended to omit the legal constraints restricting the separation of deciding executions of important operations and monitoring. See Sect. 5.2 below. 33 Art. 416(4) of the CA. 34 Art. 399-13(5) of the CA. 35 Art. 399-13(6) of the CA. Kanda and Yamanaka (2016) clarified that there are 327 listed companies on the TSE that changed their board structure to a 'one-board and one-committee company' (all from a 'two-board company') on and after one year from the amended CA's effective implementation (1 May 2015 to 30 April 2016), and 87% (286 companies) of them met the conditions for delegating 'the decision on the execution of important operations' to directors. Specifically, 87% (285 companies) stipulated this delegation in its articles of association. By contrast, outside directors are the majority in only 4% (14 companies). Further analysis on the 'one-board and one-committee companies' and 'competition' in board structures will be provided by Professors Kanda and Milhaupt and the author.

Board Committees
Nearly all the codes in Europe recommend setting up three key committees: a nomination, a remuneration, and an audit committee. 36 It is noted that the difference between committees with and those without decision-making powers is less important than one might think since in practice, when the full board makes its decision, it will normally follow the committees' recommendations. 37 In Japan, the CA requires three committees for 'one-board and three-committee companies', 38 and one committee ('audit & supervisory committee') for the 'oneboard and one-committee companies'. 39 The powers of these committees are not delegated by a board of directors but are provided for under the CA itself. 40 Therefore, for these two board structures, individual companies have limited flexibility in delegating monitoring powers and authority from a board to a committee. 41 The CA does not stipulate/require any committee for 'two-board companies'. However, the CG Code recommends optional advisory committees for 'two-board companies' and  26-27. 38 They are the nominating committee, the audit committee, and the remuneration committee (Art. 2, item 12 of the CA). They are addressed in Arts. 404(1), 404(2), and 404(3), respectively, of the CA. The members of these committees should number more than two (Art. 400(1) of the CA) and should have been elected by a board resolution (Art. 400(2) of the CA); the majority on the committees should be outside directors (Art. 400(3) of the CA). 39 Art. 2, item 11-2 of the CA. See Art. 399-2 of the CA. For 'one-board and one-committee companies', the board and 'audit & supervisory committee' are clearly separate in terms of powers. The committee exercises the following powers: (1) audit of execution of duties of directors, etc. and preparation of the audit report, (2) the determination of the content of proposals regarding the election, the dismissal of an accounting auditor or the refusal to re-elect an accounting auditor to be submitted at a shareholders' meeting, and (3) the determination of opinions of the committee prescribed in Arts. 342-2(4) and 361(6) of the CA (Art. 399-2(3) of the CA). See infra n. 53 and the accompanying text. For members, committee members should be a director (Arts. 399-2(1) and 399-2(2) of the CA) who was elected at the shareholders' meeting separately from the other directors (Art. 329(2) of the CA). The committee should consist of more than two members, and its majority should be outside directors (Art. 331(6) of the CA). 40 In Japan, the allocation of powers between a board and its committees is stipulated in the CA. At first glance, this suggests that mandatory elements appear to be abundant in Japan's CA. Further analysis of this aspect will be provided by Professor Kanda and the author. 41 Individual companies are not prohibited from establishing optional committees. The companies doing so are increasing, however, they are currently not predominant-about 26-32% of those in listed companies in TSE Sections 1 and 2. Specifically, for 'two-board companies', 28.3% (530 companies) established this type of optional nominating committee, and 31.6% (592 companies) used remuneration committees. For 'one-board and one-committee companies', 25.7% (173 companies) established an optional nominating committee and 28.4% (191 companies) used remuneration committees. All this has taken place as of 18 July 2018. See the JPX website, supra n. 24. 'one-board and one-committee companies' when independent outside directors do not form a majority of their board. 42 A convergence appeared in that the significance of having three committees within a board of directors is also recognised in Japan. However, the divergence would be that in practice, these committees are still not predominantly present. 43

Information Stream: Boards and Committees
In Europe, information is a key problem facing boards in the exercise of their functions, particularly with respect to monitoring. 44 It is pointed out that obtaining sufficient, unbiased information on events within the company is crucial but also difficult for independent directors in one-tier systems; this can be even more difficult for supervisory board members in two-tier systems. 45 In Japan, statutory auditors may at any time request reports on the business of 'two-board companies' from the directors, accounting advisors, and managers or other employees; they can also investigate the status of a company's operations and the financial status of the company. 46 Further, statutory auditors may also request reports from a subsidiary of the company on its business or investigate its operations status and financial status if it is thought to be necessary for performing their duties. 47 For 'one-board and three-committee companies', the investigation powers of an audit committee are provided for under the CA, 48 and the directors may inspect or copy the minutes of the three committees. 49 The powers of a nominating committee and a remuneration committee are also specified in the CA. 50 It is stipulated 42 Specifically, Japan's CG Code stipulates the following: '[i]f the organizational structure of a company is either Company with Kansayaku Board ['two-board companies'] or Company with Supervisory Committee ['one-board and one-committee companies'] and independent directors do not compose a majority of the board, in order to strengthen the independence, objectivity and accountability of board functions on the matters of nomination and remuneration of the senior management and directors, the company should seek appropriate involvement and advice from independent directors in the examination of such important matters as nominations and remuneration by establishing independent advisory committees under the board, such as an optional nomination committee and an optional remuneration committee, to which independent directors make significant contributions. ' Art. 381(3) of the CA. One interpretation of the legal provision says that the core purpose of auditing by statutory auditors is to ensure compliance within the company. See Kanda (2018), pp 243-244. However, there is no way of knowing whether they are functioning well. See Kanda (1997), p 187. 48 Art. 405 of the CA. 49 Art. 413(2) of the CA. 50 Arts. 404(1) (nominating committee) and 404(3) (remuneration committee) of the CA. It is also stipulated that the persons appointed by the nominating committee from among the committee members shall report the status of the nominating committee's execution of its duties to the board of directors meetings without delay (Art. 417 (3)). that executive officers and directors, etc. shall attend these committee meetings if requested and shall provide explanations on any matters raised by these committees. 51 For 'one-board and one-committee companies', it is stipulated that the 'audit & supervisory committee' shall be organised from all the 'audit & supervisory committee' members. 52 The investigation powers of an 'audit & supervisory committee' are stipulated in the CA, 53 and the committee members selected by the committee may request that directors, etc. and managers or other employees report on matters related to the execution of their duties and also investigate the operations status and the financial status of the company at any time. 54 These powers may not be granted to the board of directors. 55 A convergence appears to exist in that the importance of information streams is recognised both in Europe and Japan. In Japan, information streams are ensured by specific provisions in the CA for the three board structures, while those between board and optional committees are not legally secured.

Recent Amendments
In Japan, outside directors and outside statutory auditors were traditionally not required and/or recommended by any legal norms until 1993. An outside statutory auditor was required for the first time for large 'two-board companies' with the 1993 amendment to the Commercial Code. 56 Currently, outside directors are recommended both by the CA and the CG Code on a 'comply or explain' basis. 57 The number of companies with outside directors and the total number of outside directors are thus increasing rapidly among Japan's listed companies. 58 51 Art. 411(3) of the CA. 52 Art. 399-2(1) of the CA. See supra n. 39. 53 Art. 399-3 of the CA. 54 Art. 399-3(1) of the CA. In addition, the committee members selected by the 'audit & supervisory committee' may request reports on the business from a subsidiary of the company or may investigate the status of operations and the financial status of the subsidiary if it is thought to be necessary for performing the duties of the committee (Art. 399-3(2) of the CA). 55 See Kanda (2018), p 252. 56 It was stipulated that the board of statutory auditors in large companies should consist of more than two members, and at least one of them should be a person who was not a director or a manager or other employee of the company or its subsidiary for previous five years (amendment by Art. 2 of Act No. 62/1993). 57 See Sect. 1.2 above. 58 For example, the ratio of companies listed in TSE Section 1 with at least two independent directors increased from 15.0% in 2011 to 91.3% in 2018. See the JPX website 'Appointment of Independent Directors/Auditors' (http://www.jpx.co.jp/engli sh/listi ng/other s/ind-execu tive/index .html).

Board Composition
In the UK, the rules of the Companies Act offer little information regarding board composition, 59 while in Germany, the AktG mandates that a supervisory board be composed of shareholder representatives and labour representatives. 60 In Europe, corporate governance codes were adopted in major jurisdictions during 1990s and 2000s. 61 However, it is pointed out that only the UK code recommends a majority of independent directors. 62 It is also noted that the UK model was designed to address a managerial agency problem under a dispersed ownership structure, and similar codes spread to continental Europe, where the problem is not typical, in order to attract US portfolio investments. 63 In the UK, the current recommendation is that at least half the board should comprise independent NEDs. 64 In Japan, boards of directors were traditionally not diversified; most directors were internally promoted former employees and executive managers, 65 and 'outside directors' in the sense of part-time directors were not in the majority. Outside directors as legal corporate bodies were first introduced with the amendment to the CA in 2001. 66 Before the introduction of 'one-board and three committee companies' in 2002, 67 the CA did not provide any rule regarding the composition of a board of directors. 68 In this setting, outside directors are currently not the majority in Japan's listed companies. 69 Even though Japan is closer to the UK than before, they are still divergent on the composition of boards as a whole. This arguably reflects the traditional ownership structure in Japan, which was not diversified until the late 1990s. 70 59 See Davies (2013)

Independence
In Europe, a recommendation of the European Commission defined 'independent' as being 'free of any business, family or other relationship, with the company, its controlling shareholder or the management of either, that creates a conflict of interest such as to impair his judgement.'. 71 It is noted that most national corporate governance codes have incorporated all or most of the recommendation's catalogue. 72 In Japan, the concept of an 'outside' director 73 or statutory auditor 74 currently means that in terms of business execution or previous employment, while that of an 'independent' director and/or statutory auditor is 'unlikely to have conflicts of interest with general investors'. 75 A significant convergence seems to have developed between Europe and Japan regarding the concept of 'independence'.

Institutional Investors and Stewardship
In Europe, institutional shareholding is prevalent in some countries, including the UK, Sweden, and France. 76 It is pointed out that the UK was the first country to try to activate institutional shareholders in taking up a role in internal corporate governance, 77 while at the same time re-examining directorial accountabilities. 78 In Germany, a less significant role of the stock market correlated with the smaller importance of institutional investors of German origin. 79 In Japan, cross-shareholdings have traditionally been influential. 80 However, shareholdings by foreign investors have been rising constantly since the 1990s, 81 and ownership by institutional investors seems to have been on the increase since the 2000s. 82 Institutional investors appear to have obtained a larger influence over corporate decision making than before, 83 as have proxy advisors. 84 In this setting, Japan's Stewardship Code came to be enacted. 85 However, it appears that active investors are in practice not predominant, and most proposals by companies are commonly approved at shareholder meetings without any changes. 86 A convergence appeared between the UK and Japan regarding the adoption of the Stewardship Code and the role of institutional investors.

Division of Powers Between Board and Shareholders
In Europe, it is noted that there are more board-centric and more shareholder-centric systems addressing the division of powers between boards and shareholders. 87 In Japan, it is stipulated that for 'companies with a board of directors', shareholder meetings may only resolve matters provided in the CA and the articles of association. 88 The powers of shareholder meetings are limited in the CA to the following: (1) appointment and removal of directors and statutory auditors, etc., 89 (2) fundamental changes of the company, 90 (3) matters concerning something of significant interest to all shareholders (including dividends), 91 and (4) (Table 3). 83 They include, for example, public pension funds (Government Pension Investment Fund, hereinafter 'GPIF'). GPIF is managing as much as 156 trillion Yen (more than 1 trillion Euro) as of March 2018, and 25% of that has been invested in domestic shares. Government Pension Investment Fund (2018), pp 1, 4. 84 For example, Institutional Shareholder Services and Glass Lewis are also providing their proxy voting guidelines for Japan. See the websites of the former (https ://www.issgo verna nce.com/file/polic y/activ e/asiap acifi c/Japan -Votin g-Guide lines .pdf) and the latter (http://www.glass lewis .com/wp-conte nt/uploa ds/2017/12/2018-Guide lines -JAPAN .pdf). 85 See supra nn. 11 and 15. 86 Japan's CG Code stipulates the following: '[t]aking the requests and interests of shareholders into consideration, to the extent reasonable, the senior management and directors, including outside directors, should have a basic position to engage in dialogue (management meetings) with shareholders.' (Supplementary Principle 5.1.1). Japan's Stewardship Code does not contain a specific provision addressing with whom investors must speak, but it does stipulate on proxy advisors as follows: '[w]hen institutional investors use the service of proxy advisors, they should not mechanically depend on the advisors' recommendations but should exercise their voting rights at their own responsibility and judgment and based on the results of the monitoring of the investee companies and dialogue with them.' (The Council of Experts on the Stewardship Code (2017), Guidance 5-4). See supra n. 15. 87  Europe and Japan appear to be converged on this point. 95

Appointment and Removal
In Europe, it is noted that candidates proposed by the board are usually elected, 96 and thus there is a serious potential principal-agent conflict between shareholders and the board. 97 In Japan, directors and statutory auditors, etc. are elected by resolution at shareholders' meetings. 98 For 'two-board companies', in principle, directors are appointed for two years at a time, 99 while for 'one-board and one-committee companies' (excluding 'audit & supervisory committee' members) and 'one-board and three-committee companies' this is for one year. 100 In all of these structures, directors (excluding 'audit & supervisory committee' members) can be removed by a simple majority vote at a general meeting at any time. 101 Candidates are nominated by the board in 'two-board companies' and 'one-board and one-committee companies' 102 or by the nominating committee in 'one-board and three-committee companies'. 103 They are approved accordingly at the shareholders' meeting, and they are rarely removed.
Europe and Japan have converged on the point that, in practice, candidates are proposed by the board and are usually elected accordingly by shareholders' meetings. In Japan, 'one-board and three-committee companies' are rare, 104 and the optional nominating committees are currently not predominant. 105 It has often been said that directors in practice are largely selected by a representative director in 'two-board companies'. 106 These can be understood as one of the persistent divergent aspects between Europe and Japan. 95 See Davies et al. (2013a), pp 106-109. See supra n. 2 and the accompanying text. 96 Davies et al. (2013a), p 38. 97 Davies et al. (2013a), p 38. 98 See supra n. 89 and the accompanying text. 99 Art. 332(1) of the CA. This term of office can be shortened by articles of association or a resolution of shareholders' meeting (the same provision). 100 Arts. 332(3) and 332(6) of the CA, respectively. 101 Arts. 339(1), 341, and 344-2(3) and Art. 309(2), item 7 of the CA. In principle, a general meeting shall be called by directors (Art. 296(3) of the CA). In addition, shareholders who have had at least 3% of all the voting rights of a company for six consecutive months can request that the directors call for the meeting (Art. 297(1) of the CA) and subsequently do so by themselves under the permission of the court if this request is not accepted (Art. 297(4) of the CA). 102 Art. 298(4) and Art. 298(1), items 2 and 5 of the CA and Art. 63, item 7(a) of the Ordinance for Enforcement of the Companies Act (kaishahō shikō kisoku).

Remuneration
In the UK, a board (or a remuneration committee) of a quoted company is required to draw up a directors' remuneration report for the company, beginning in 2002. 107 In Germany, a shareholders' meeting may give an advisory vote (say-on-pay) regarding the remuneration of directors beginning in 2009. 108 In Europe, the Shareholders' Rights Directive mandates a vote on the remuneration policy of directors. 109 Many corporate governance codes, including those in the UK, positively recommend a substantial element of variable pay in directors' remuneration and the linking of the amount of that payment to the achievement of shareholder-oriented goals. 110 In Japan, remuneration for directors shall be fixed by a resolution at the shareholders' meeting if it is not prescribed in the company's articles of association. 111 Usually, only the total maximum amount of remuneration is approved at shareholders' meetings, and the distribution to individual directors is delegated to a representative director by a board resolution. 112 Considering this traditional practice, remuneration is arguably not linked to the achievement of shareholder-oriented goals in Japan. 113 Currently, Europe and Japan seem to be divergent on this point despite an argument regarding more incentive-oriented remuneration in Japan. 114

Takeovers
The threat of the management of target companies being replaced as a consequence of a takeover is in principle a powerful incentive that directors are driven to avoid. 115 This works as an accountability and incentive strategy. 116 It is pointed out that the question as to what defences are allowed against takeovers is controversial in Europe. 117 In Japan, a staggered board cannot be adopted legally. 118 However, takeovers are currently not very common for listed companies, 119 while more than three hundred public firms have introduced the 'Japanese version' of the poison pill since 2005. 120 In general, it appears that takeovers do not commonly work in practice-directors in listed companies are rarely removed by takeovers.
It was pointed out that the extent to which a target board can act to frustrate or stop hostile takeover attempts without asking shareholders' approval is still unclear in Japan. 121 The convergence and divergence of the legal settings and practices between Europe and Japan remain to be discussed.

Board and Creditors
In Europe, it is noted that creditors are usually not protected by board rules but instead by general company law such as capital maintenance rules, restrictions on distributions and shareholder loans, and especially by insolvency law. 122 In Japan, the situation is similar. Notably, in cases where a stock company reduces the amount of its capital or reserves, creditors of the company may state their objections, 123 and in such cases, the company is required to take additional measures. 124 The amount of surplus of a stock company is stipulated, 125 and based on this, dividends are restricted. 126 Additionally, a creditor may request a rescission of certain transactions. 127 Further, third parties, including creditors, are able to bring suits against directors, accounting advisors, statutory auditors, executive officers, and/or accounting auditors if they have committed intentional misconduct and/or acted with gross negligence in performing their duties. 128 Regarding general rules in company law and insolvency law, some converged elements are observed between Europe and Japan. A Japan-specific legal framework also exists regarding this.
118 Directors can be removed by a simple majority vote at a shareholders' meeting (Art. 339(1) of the CA). See supra n. 101 and the accompanying text. Therefore, a staggered board would not work as an anti-takeover mechanism. A directors' term of office is one or two year(s) in listed companies. See supra nn. 99 and 100 and the accompanying texts. 119 For an analysis of the earlier stage, see Milhaupt (2005a). 120 See Kanda (2009), p 414. 121 Kanda (2009), p 422. 122 Davies et al. (2013a), p 75. For a theoretical analysis of this issue, see Armour et al. (2017b). 123 Art. 449(1) of the CA. 124 Arts. 449(2) and 449(5) of the CA. 125 Art. 446 of the CA. 126 Art. 461 of the CA. 127 This is found under Art. 424 of Civil Code (minpō). Specifically, a creditor may demand the court to rescind any act which a debtor committed with the knowledge that it will prejudice the creditor; provided, however, that this shall not apply to the cases where any person who benefits from such act did not know, at the time of such act, that the creditor will be prejudiced (Art. 424(1) of the Civil Code). 128 Art. 429(1) of the CA. See Sect. 4.1.1 below.

Board and Employees
In Europe, there are various techniques for representing employee interests in the company. 129 It is noted that the three main techniques are: (1) calling on the board to focus not only on shareholders' interests but also on the interests of employees, (2) providing for a works council with information, consultation, and co-determination rights, at plant level as well as sometimes group level, and (3) giving employees a number of seats on the board. 130 In Japan, there is no legal norm that requires boards of directors to include employees of the company. However, boards have traditionally consisted mainly of former employees. 131 Therefore, the position of director is traditionally and commonly regarded as the highest position for an employee to obtain within the company, even though their legal status is different. 132 In this sense, internal promotion is still predominant for executive directors. 133 One might say that there are functionally converged elements between Europe and Japan regarding boards and employees in the sense that there is a mechanism that tries to harmonise their interests, even though they are legally and doctrinally different.

Board and Other Stakeholders
In Europe, stakeholders other than employees and creditors are usually not protected by board rules and company law; instead, they are protected by other laws, particularly those related to information and social accounting. 134 However, in some countries that provide for a stakeholder-oriented approach to the board, the board has to consider not only employees' and creditors' interests, but more broadly, the interests of other stakeholders as well. 135 In Japan, the enlightened shareholder-value approach is not adopted in the CA or in any other related legal rules. The idea that the purpose of the company and company law is to maximise shareholder value seems to be more accepted in the legal literature now than before in Japan. 136 It seems that Europe and Japan have generally converged on the point that stakeholders other than employees and creditors are usually not protected by board rules and company law. 129 See Davies et al. (2013a), p 68. 130 Davies et al. (2013a), p 68. 131 See supra n. 26 and Sects. 2.2.2 and 3.1.3 above. 132 The relationship between companies and directors is governed by the provisions on mandate (inin) (Art. 330 of the CA), while the position of employees is based on an employment contract between company and them. 133 As a general trend, the size of boards has shrunk over the last twenty years. In this setting, the proportionate share of directors other than outside directors has declined due to the recommendation of adopting outside director(s) by the CA and the CG Code (see Sect. 1.2 above). This means that there would be fewer possibilities than before for employees to be elected as directors of the company for which they are working (assuming the number of employees is constant). 134 See Davies et al. (2013a), p 76. 135 See Davies et al. (2013a), p 76.

Civil Liabilities
The number of cases in Europe in which directors are actually held liable for violating their duty of care are limited, and a major factor in this is the business judgement rule. 137 What European countries consider to be a conflict of interest varies considerably: the UK goes very far, while most European continental countries circumscribe the definition more narrowly. 138 It is pointed out that directors are rarely sued and held liable in the UK, 139 and in all jurisdictions, the level of civil litigation is low when a company is a going concern. 140 In Japan, directors owe duties and can be liable both to the company 141 and to third parties. 142 For the former, derivative suits were introduced by the amendment of the Commercial Code in 1950 after the example of the US: shareholders who have consecutively owned shares in a company for the preceding six months or more are able to bring derivative suits. 143 Since 1950, the fee for filing derivative suits has been high, and derivative suits have not been common. 144 However, the fee was amended in 1993 to 8200 Yen (approximately 80 Euros) regardless of the amount of the plaintiff's claims, and thus, the number of derivative suits rose rapidly; this changed the landscape regarding lawsuits in Japan. 145 Currently, directors' duties to a company are actually enforced both by derivative suits and by suits filed by the company. 146 For the latter (directors' duties to third parties), one of the major risks facing directors in listed companies regarding lawsuits seems to be the claim based on financial misstatements under the FIEA. 147 Until recently, a considerable number of cases were reported in which the directors were sued and held liable by the court. 148 In Japan, directors' duties of care and loyalty to the company are not clearly separated, 149 and the business judgement rule has not been established as a general provision and/or in its general form. 150 Against this backdrop, Japan's situation in addressing actual liabilities appears to be very different from that of the UK. Japan is also divergent from Germany in that derivative suits have been frequently filed in Japan since 1993. 151 This difference can at least be explained by the requirements regarding the number of shares held (Germany: 1%; Japan: one share unit). 152 A similarity appeared in that companies are suing their directors both in Germany and Japan. 153 147 See supra n. 142. Further analysis on this point will be reported separately. 148 See supra nn. 146 and 147. 149 Specifically, it is stipulated that directors shall perform their duties for stock companies with loyalty and in compliance with existing laws and regulations, articles of association, and the resolutions of shareholders' meetings (Art. 355 of the CA). See supra n. 141. This provision is understood by the Supreme Court judgement of 24 June 1970, Minshū 24-6-625, 632 not as a provision that stipulates additional duties other than the duty of care based on a common mandate relationship, but as an extension and clarification of the duty of care that is stipulated in current Art. 330 of the CA and Art. 644 of the Civil Code. 150 Specifically, there is no provision that stipulates a business judgement rule, and the Supreme Court has not yet established such a rule in a general form. There is a Supreme Court judgement of 15 July 2010, Shūmin 234-225. However, this is not considered to be a general rule but instead a judgement that solved only a specific case, even though lower courts have provided similar judgements after this ruling. It is commonly understood that Japan's 'business judgement rule' in this sense is different from the US since courts consider all the facts regarding the decision in a trial, including the process and/or the content of the judgement, and presumptions are not granted under this rule. 151 See supra nn. 144 and 145 and the accompanying texts. If plaintiff shareholders are partially or completely successful in their suit, they may request that the company reimburse the amount that is found to be reasonable, provided they have paid the necessary costs (excluding court costs) or shall pay the fees to attorneys or legal professional corporations with respect to the suit (Art. 852(1) of the CA). 152 Art. 148(1) of the AktG. See Davies et al. (2013a), p 80. In Japan, as a default rule, any shareholder who has had shares in a company for a consecutive period of the preceding six months or more can demand that the company bring suits to their directors, statutory auditors, and executive officers, etc. (Art. 847(1) of the CA). The requirement of the amount of shares can be raised to 'one share unit' by the provisions of the articles of association (Art. 189(2) of the CA). If the company does not bring suits on or within sixty days from the demand, the shareholders are able to do so by themselves on behalf of the company without obtaining permission by the court (Art. 847(3) of the CA). 153 In Germany, supervisory boards have no autonomous entrepreneurial discretion in the decision whether to claim damages against its directors when it appears that the company is able to do so under the ARAG/Garmenbeck judgement by the Federal Court of Justice (Bundesgerichtshof) on 21 April 1997, BGHZ 135, 244, 254. See Roth (2008 pp 340-341. See also Davies et al. (2013a), p 82 and Roth (2013), p 342.

Indemnification
In Germany and France, indemnification is not specifically and explicitly provided for in the companies acts. 154 By contrast, in the UK, indemnification is clearly stipulated 155 despite the fact that the risk of civil liability seems to be near zero for directors as long as the reported cases are being considered. 156 Japan currently lacks a specific provision in the CA that stipulates indemnification. It has been unclear as to whether companies are able to indemnify their directors under the current legal settings. Recently, an interpretation was proposed that under the current legal settings allows for indemnification in specified situations, on condition that certain procedures are observed. 157 Furthermore, ongoing discussions have been taking place to introduce indemnification as a specific provision of the CA. 158 It was unclear as to whether indemnification would be permitted in Japan. However, Japan's CA will be closer to the UK and the US in that it is specifically and explicitly stipulated in the CA if such amendments are made in the future.

D&O Insurance
In Europe, a directors' and officers' liability insurance (hereinafter, 'D&O insurance') is generally permitted, though often with some restrictions-either in law or in practice-on its cover against criminal liability or civil liability for intentional wrongdoing. 159 In the UK, companies are allowed to purchase and maintain D&O insurance by the Companies Act, 160 and it is recommended that companies purchase D&O insurance to protect their directors. 161 In Germany, it is not recommended that companies do so. However, a mandatory deductible is stipulated in the AktG 162 and recommended ('soll') by the DGCK. 163 In Japan, D&O insurance is commonly purchased by listed companies to protect their directors from the risk of being sued and held liable even though it is not required or recommended by any legal rules. 164 There is an ongoing discussion about whether a specific provision should be introduced in the CA to clarify companies' procedures required for purchasing a D&O insurance. 165 A convergence appeared between Europe and Japan on the point that it is not prohibited for companies to purchase a D&O insurance for their own account, while whether it is desirable to do so or not has not been clarified in the CG Code in Japan. 166

Criminal Liabilities and Regulators
With a few exceptions, 167 criminal law in Europe does not seem to play an important direct role in the enforcement of a director's duty of care and loyalty to the company. 168 Additionally, whilst administrative regulatory bodies are well established and active in financial markets, they are much less prominent in enforcing the duties of directors to their companies, which are regarded essentially as matters of private, not public, concern. 169 In Japan, criminal liabilities do not seem to play an important role generally in the enforcement of the directors' duties. 170 There is no administrative regulatory body that has the power to file civil suits against directors. 171 Directors' disqualifications have not been introduced.
A convergence can be observed in that in general criminal courts and regulators play no/a limited role in enforcing directors' duties of care and loyalty to their company.

Convergence and Divergence Between Europe and Japan
Japan's ownership structure has changed significantly over the last 20 years through foreign investments. Currently, it would be inappropriate to consider it cross-shareholding as a whole. In that respect, the major convergence in Europe and Japan would be the adoption of the 'comply or explain' approach through the CG Code and the Stewardship Code.
However, specific characteristics are observed in corporate boards in Japan. First, and above all, it is not clear whether Japan's corporate governance is aimed at institutional investors, as in the UK, or at independent directors with a 'monitoring board', as in the US. 172 Second, management and monitoring are not separated in the currently prevailing 'two-board companies'. In this setting, Japan's outside directors participate in the resolution of a board of directors on decisions concerning the execution of important operations, which is arguable. Third, the powers of committees in 'one-board and three-committee companies' and 'oneboard and one-committee companies' are not delegated by the board but stipulated rigidly in the CA. Thus, there is limited flexibility for individual companies to design the efficient allocation of powers between its board and its committees, which is different from a representative one-tier board, especially in the UK and the US. The roles and functions of outside directors in these settings seem to be characteristic of Japan.
Regarding the incentive framework, practices on nominations and remuneration are changing because of the CG Code. However, one might say that they are still not substantially different from the past considering that there are few 'one-board and three-committee companies' and that optional nominating committees and remuneration committees among the 'two-board companies' and 'one-board and one-committee companies' are currently not predominant.
Japan seems unusual in terms of enforcement, as a significant number of reported cases have been observed in which executive directors and outside directors are sued for breach of their duty of care and loyalty to the company, concepts that are not clearly separated in Japan. The situation of actually imposed liabilities appears to be very different from the UK, even though there are some similarities between Germany and Japan regarding suits filed by the company.
Several converged elements appeared in corporate boards between Europe and Japan. However, as a whole, they can still be said to be divergent at this moment. This is at least partly explained by the Japan-specific long historical development of company law rules, and they remain to be discussed.

Possible Further Amendments and Remaining Issue
There is an ongoing discussion in Japan concerning further amendments to the CA. 173 The discussion relates to issues affecting directors' incentives (including remuneration, indemnification, and D&O insurance) and outside directors.
As for the former, the first topic being discussed is the clarification of companies' procedures and disclosures required for providing remuneration. 174 Second, currently under consideration is the possibility to introduce a provision to clarify companies' targets and procedures for indemnifying companies' directors, statutory auditors or executive officers, etc., which have not been clear under current legal rules. 175 Third, a provision to clarify companies' procedures to purchase a D&O insurance is also under consideration. 176 As for the latter, it is discussed whether an outside director in 'two-board companies' should be mandated or not. Other issues include relaxing the legal constraint on the delegation to directors of decisions regarding the execution of important operations 177 and making it possible to separate managing and monitoring functions of the board. 178 At this moment, it is not clear whether the next amendment to the CA will be made with those changes in mind. In Japan, drivers of change include market forces and most importantly investments from overseas. 179 Recent amendments have been motivated by market forces and have focused both on shareholders' governance mechanisms through institutional investors and on outside directors within companies. 180 One of the most important questions that remain to be resolved is the direction in which further amendments should be made and how legal rules need to be transplanted in harmony with Japan's historical development. Therefore, convergence and divergence will be clarified further.