Corporate governance for a continuous “earning power”: Honest opinions of female outside directors
Encouraged by the Tokyo Stock Exchange’s market restructuring and various reforms, there has been a rapid movement towards strengthening corporate governance. With this movement, the role of outside directors is growing increasingly important in the board of directors,the highest body involved in the execution of a company’s operation. In this interview, Etsuko Okajima of ProNova Inc., who actively serves as an outside director in multiple companies, and Aiko Mochizuki, Partner at IGPI, discuss the role of the board of directors, requirements for outside directors, and what diversity brings to companies.
The changing governance structure of Japanese companies
Aiko Mochizuki You not only have extensive experience as a director, but you have also been working to develop and connect individuals in management. Are there any changes that you have noticed lately among the board of directors in Japanese companies?
Etsuko Okajima I have served as an outside director for 8 public companies so far, but I feel there have been drastic changes since the revision of the Corporate Governance Code in 2021. Each company is updating not just their governance structure, but also the nature of their board, agenda setting, composition of members – all in effort to create the best board. Among the most significant changes is the appointment and dismissal of the CEO, which is the prime function performed by the board of directors.
Aiko Mochizuki Up till now, the current CEO had the right to choose the succeeding CEO, and it felt as though no one could go against that decision. Yet, even if a nomination committee that includes outside directors is established based on the Corporate Governance Code, I am afraid it may not function well in some companies.
Etsuko Okajima Traditionally, outside directors had been comprised of lawyers, accountants and university professors. Although they are professionals in their fields, they have little management experience, so in the past their roles were limited to monitoring. Even appointment of top management was based on a system where the executive directors select a candidate, and the board approves. However, when it comes to situations where the business is handed over from the founding family, or where the business model pivots in pursuit of discontinuous growth, it is crucial to discuss whether the individual selected by the executive directors is the best solution. This discussion becomes possible with a nomination committee where the outside directors are the majority, allowing rational decisions on appointments and dismissals to be made.
However, you are right to point out that there are limitations. For example, I have the opportunity to conduct leadership training to employees, which helps me get a good high-level understanding of the potential candidates. However, for other outside directors, this is not the case, and therefore the list of candidates presented to them by the executive directors look nothing more than symbols. To an extent, it is inevitable for the nomination committee to rely on the executive leadership’s perspective and evaluation – a challenge of this committee system.
Aiko Mochizuki Nevertheless, once you are appointed as a director, you must take responsibility and ownership, as a good board of directors always engages in honest discussions about management. Anything can happen in the field of management, but when an issue does arise, the speed and accuracy of response all depend on the regular discussions held in board meetings. There is no use for directors if they are unreliable and could only act as they are told in a state of emergency.
Etsuko Okajima At Marui Group, where I serve as the outside director, the board of directors focuses on the mid-long term strategic planning, while the short-term strategic planning and execution is delegated to the executive directors. This is a helpful approach because the roles are clear, and there is trust between the board and the executive team, so during the board meeting we can invest our time not just on resolutions of proposals but also on matters for discussions.
The weight of fiduciary responsibility and the arduous decision-making
Aiko Mochizuki When building trust with the executive team, it’s important to bring straightforward questions to the table. At IGPI, we often talk about “challenging existing norms”, but I believe this is where the role of outside directors comes into play. On the other hand, how do you think they differ from advisors?
Etsuko Okajima The role that is expected of outside directors depends on which stage the board is in. In the beginning, it is about serving as the management board. For companies such as startups, discussions at this stage center around execution, such as setting revenue targets and KPI, sales strategy and so on. The next stage is the advisory board, where they look at the mid-term business plans and earnings presentation materials, and advise on improvements and how to answer questions. The third stage is the monitoring board, where they monitor KPIs. The fourth stage is the innovation board, where they provide an external point of view towards the mid-long term business strategies. Outside directors are expected to provide value with a metacognitive perspective both in terms of time and space. While advisors assist with the decision-making, outside directors have the right and responsibility to make decisions on behalf of the shareholders. I believe this is the essential difference between the two.
Aiko Mochizuki I have held advisory roles as part of my consulting practice at IGPI and experienced assuming the role of an outside director for a public company for the first time in my late thirties. Till then, I had only been pressing the board to make decisions, but once I was in the position to make those decisions myself, I suddenly became aware of the weight of responsibility I carried.
Etsuko Okajima There are always tradeoffs in the agenda items in a board meeting. Acquisitions, withdrawals, restructuring, etc. – everything has a risk whether you decide to do them or not, and no one knows the right answer. After discussing from different angles, what awaits is the arduous decision-making at the end.
Aiko Mochizuki Not only is it arduous, but I find it just as rewarding. I feel that the board comes together as one through making such decisions together.
Etsuko Okajima I agree. Previously, Mr. Masaaki Tanaka, the outside director of Money Forward, taught me the concept of “collegiality”. While having their own field of expertise, each director engages in an honest discussion with the same purpose of maximizing the corporate value. There may be conflicting opinions, but in the end they are your buddies that sublimate decision-making. I believe it’s important to cultivate this level of trust among the directors.
A board is not for decoration. Good questions must be asked
Aiko Mochizuki What kind of skills or experience do you think are necessary to become a good director?
Etsuko Okajima It is very important to have understanding of the business, but you could never understand it better than the executive members. From my experience, even if you understand abstract aspects such as the company’s core competence, it would take about two years to reach a level of business understanding that contributes to decision-making. Since the executive team has that covered, there are many other angles in which you could contribute. For example, my expertise lies in organization development, and since the approaches and methodologies of that field are fairly applicable to any company, I can utilize it as a common solution in nomination committees. Also, what’s definitely necessary is the ability to ask good questions. I think it is important to formulate hypotheses based on what you would like to know from the standpoint of shareholders and stakeholders, and how you can be accountable.
Aiko Mochizuki Your background is in organization development, but you are always proactively engaged and asking questions even if they are finance and M&A-related discussions. Where did you gain the knowledge in those fields?
Etsuko Okajima I actually began my career in corporate finance at Mitsubishi Corporation, where I spent four years in a department working on leveraged buyouts, venture capital investments, and so on. Then, I moved to a corporate accounting department where I was in charge of consolidated accounting and investor relations for about 600 companies. My time at Harvard Business School was also significant, but I believe the lessons I’ve learned at Mitsubishi Corporation have been extremely helpful.
Aiko Mochizuki If your expertise was organization development without any experience in finance, do you think it would be difficult to serve as an outside director?
Etsuko Okajima Probably difficult. This is because oftentimes the executive members think in the “P&L (profit and loss statement) mindset”, and lack the insight in corporate finance. This is especially true of members who solely worked up the ladder in sales; they do not understand the mindset behind the balance sheet statements, and we as outside directors must support them heavily in the management board stage. In the following stages, it becomes crucial to speak with the financial market. I often have one-on-one conversations with activist investors and get asked to speak in meetings for institutional investors, but I receive quite sharp questions in those situations.
Aiko Mochizuki An individual cannot take on the role of an outside director if they are simply looking for status, or seeing the board as decoration. Outside directors carry the risk of getting sued.
Etsuko Okajima The job of an outside director comes with extremely heavy responsibilities including duty of care, so I am concerned that it is sometimes seen as commendable, or a pretty, nice-to-have career. In reality, it’s a mixed martial art, just like the work at IGPI. You will be required to think of solutions for various issues and dimensions, so individuals must be T-shaped, with the depth as well as broad application of their expertise.
Women can be more empowered by abandoning stereotypes
Aiko Mochizuki You mentioned “collegiality” earlier, but I also often come across diversity as a keyword. Do you believe diversity yields the power to continuously earn?
Etsuko Okajima There are two major challenges facing companies today. The first is the labor shortage. It is estimated that by 2040, the workforce will be short of 11 million people. It is crucial to increase the productivity of each individual and to become the company that chooses and is chosen by the labor market. For this to happen, organizations must incorporate inclusivity and redefine the way they work and the nature of the company. The second challenge is that companies will die without discontinuous growth. This is where diversity is effective. Companies must demonstrate perspectives and viewpoints that differ from the past patterns of success, and question if the usual approach is good enough, as well as if there are any opportunity losses.
Aiko Mochizuki True, if you simply check off the accounting skills in a matrix, all the accountants in the world would appear the same. Recently, there have been more women being appointed to secure diversity in boards, but what do you think of the often-quoted combination of “diversity and women”?
Etsuko Okajima Half of the population is women, and many of them are very talented. However, due to some kind of bottleneck, the goal raised by many companies to increase “the female management ratio to 30%” unfortunately cannot be achieved in Japan as a whole. This is related to the aforementioned first challenge companies face, as in order to increase each individual’s productivity, there is a need to remove the unconscious bias that hinders women empowerment. To overcome the second challenge of discontinuous growth, it is important to not simply promote women’s advancement, but to incorporate the perspectives of minorities including women – a brand new perspective that differs from the traditional viewpoint in management. In so-called Japanese Traditional Companies (JTC), it is difficult to implement the PDCA cycle with just monocultural men in their 50’s and 60’s, which make up the majority. I believe we are currently trying to investigate and experiment how to achieve discontinuous growth by starting with the appointment of women, the largest of the minorities.
Aiko Mochizuki I have seen many companies with regards to the empowerment of women, but I have always held one question: why is there a tendency to assign all women to departments such as planning while they are raising children, regardless of their past career experience? I have no issues with it if that is what the individual desires. However, sometimes companies decide without consultation, assuming that a certain job is impossible for someone at that time of their life. I think it would be better if there was a system that allows women to continue working in the same department, or if there were other options on the table.
Etsuko Okajima I agree. At Recruit Holdings, I run Career Cafe 28 (a career development training for female employees aged around 28) but even at a company like Recruit that is famous for its optimistic corporate culture, when it comes to life stages, I hear comments such as “it’s impossible to continue working in the way I work or with the current schedule”, or “I don’t think I can take on a manager position”. This is why we changed the appointment criteria entirely, but I believe the company as a whole, including the individuals, must change their stereotypes around working style and leadership. In addition, just as you have mentioned, it is common to find female employees that are appointed to a manager position get transferred to a completely different division after coming back from maternity leave. This means that in addition to childcare and managerial responsibilities, the employee must also learn a new job. This is too much of a burden. If they can experience a variety of jobs in their twenties, such as a combination of sales, sales planning, and HR, then they will have three different places they could return to after maternity leave, providing them with more flexibility and options to design their own working hours.
Aiko Mochizuki It’s important to question the common sense in careers as well. I believe there are many women who aspire to become outside directors, and while I wish for more women to be appointed as board members, I am greatly disappointed by some who show intention of becoming an outside director as a form of fashion. Okajima-san, do you ever get asked for introductions to companies where they could become an outside director?
Etsuko Okajima Unfortunately, it happens a lot. Regardless of their gender, I cannot introduce someone as a candidate if they do not understand management. However, it is important to have that first step. Once you’ve experienced being an outside director at one company, and if you have shown decent contribution, there are cases where you get approached by other companies as a candidate for their outside director. This is why, for the companies where I serve as an outside director, I try to nominate young, talented professionals as candidates whenever I can, so that my position will be left in good hands even after I leave.
Aiko Mochizuki I believe that when one is faced with a new job, whether people believe that individual is capable for the job or not due to lack of experience depends on how aware that individual is. If one challenges themselves to new environments rich in diversity including age and gender, they can gain many new lessons and apply their learnings in other jobs.
Etsuko Okajima That would be ideal. In 2014, I began serving as an outside director at two companies, but even after a decade of experience I still wonder what is the best pattern as a board member, and there are many lessons to be learned. Since I am constantly working at full capacity juggling between my role as an outside director, running my own business, and raising my child, people even wonder whether there are three Etsuko Okajimas! But I am only able to work this way because of my 5 year old daughter. When she becomes an adult, I want her to tell me, “My generation is better than yours, Mom”. This is why I want to contribute to the future through the pillars of sustainability, wellbeing, and human capital management.
Aiko Mochizuki It’s been over 15 years since I first met you, but I didn’t know that your daughter is the source of your refreshing, ever-changing power. With better companies comes a better world for the future. I hope to also strive to change companies, including IGPI, for the better. Thank you for your talk today.
