Trends in Board Priorities: Comparing US and Japanese Boards
This post is a guest-authored commentary piece from Human Resource Governance Leaders (HRGL) discussing the findings of Diligent Institute and Corporate Board Member’s 2023 What Directors Think survey and report. This is the first blog in a series of global commentary pieces analyzing board and governance trends in the US compared to other regions.
By Ryoko Mikami, Consultant, Human Resource Governance Leaders
In response to an increasingly uncertain external environment, the issues discussed in board meetings and the roles and responsibilities of directors are changing and evolving. What Directors Think, a survey of US public company directors conducted in collaboration between Diligent Institute and Corporate Board member, analyzes these changes over time. The report also identifies specific trends in the boardroom. The following commentary focuses on changes in CEO-related issues and priorities in board discussions as covered in What Directors Think and compares the findings to corporate governance trends in Japan.
The first trend we compare is that of executive compensation. When the following question was posed to respondents in What Directors Think; “Which of the following issues have shareholders requested to discuss with your board or management in the past year?” issues related to executive compensation ranks third on the list. Contributing to this high placement on the list of shareholder concerns is the fact that in the US, the differences in average CEO pay vs. average employee pay has come under closer scrutiny, both from shareholders and other stakeholders.
By comparison, executive compensation in Japan is generally relatively low compared to western countries such as the United States. As a result, Japanese companies tend to focus more on incentive design to attract global talent to the executive suite. Furthermore, as companies are increasingly required to address sustainability issues, some are calling for linking executive compensation to non-financial indicators. Our 2022 survey based on Nikkei 225 found that the percentage of companies with a non-financial indicator in their executive pay plans had increased to 20.9% from 13.3% the previous year. For both Japanese and U.S. companies, there is room for further discussion on the design of executive compensation.
Cybersecurity and Digital Transformation as Board Priorities
The second area we noticed a difference between Japanese and US boards is in the area of cybersecurity and digital transformation. According to the results of What Directors Think, cyber/data security and digital transformation were the two biggest issues directors had difficulty overseeing. The results indicate that U.S. companies have a greater need to promote discussions on cyber security and digital transformation at the board level.
Comparing the industrial structure of the U.S. and Japan, a high percentage of companies with the highest market capitalization in the U.S. belong to the information technology and IT sectors, while many companies in Japan belong to the manufacturing sector, suggesting that the sensitivity of IT and cybersecurity among directors of Japanese companies is relatively lower. Therefore, we speculate that Japanese boards have yet to take as high an interest in cyber and digital transformation compared with US boards.
The third is the issue of capital allocation. Similarly, When the question of “Which of the following issues do you find most challenging to oversee in your role as a director today?” was posed to respondents in What Directors Think, “Capital allocation” is listed third next to cybersecurity and digital transformation. To achieve optimal capital allocation that contributes to corporate value enhancement, the board of directors should also discuss the alignment of the asset portfolio with business strategy and investment plans to invest funds in growth opportunities. In general terms, western companies use moderate financial leverage to optimize capital, while Japanese companies have a large amount of retained earnings and have problems with aggressive shareholder returns and business investment. Japanese companies have many non-strategic assets unrelated to their core business, such as cross-shareholdings, and foreign investors expect them to allocate capital efficiently. Therefore, “capital allocation” is one of the issues that Japanese companies need to address, and we believe that the appointment of directors who can discuss capital market topics is becoming more common among Japanese boards of directors.
We examined changes in the role of the board of directors, focusing on the design of executive compensation, responses to cybersecurity and digital transformation, and capital allocation. However, the range of topics to be addressed by boards of directors, which determine the strategic direction of management and of the company, will not stop at the three points mentioned above, but will become more diverse and sophisticated in the future. In fact, 65% of the directors surveyed in What Directors Think expect “the scope of board responsibilities to expand over the next three to five years.” As the roles and responsibilities of directors change, there is an increasing need to secure human resources that can handle a wide variety of discussions.