Corporate Governance Principles--A Japanese View

The globalization of the marketplace has ushered in an era in which the quality of corporate governance is a crucial component of corporate survival. The compatibility of corporate governance practices with global standards has also become an important part of corporate success. The practice of good corporate governance has therefore become a necessary prerequisite for any corporation to manage effectively in the globalized market.The publicly-owned corporation, a basic component of corporate society, is actually a system of cooperative relationships between various stakeholders, including shareholders, employees, clients, suppliers, creditors, and management. But shareholders in particular are given a special position. As owners of the company, they are the last risk-takers who are entitled to claim the residual profits of the company. Under the system of private ownership, shareholders are granted the right of governance over the company for the benefit of their own interests. This idea forms the foundation for the corporate governance concept.In publicly owned corporations, the board of directors is the most effective vehicle of corporate governance. The current system adopts corporate governance practices only when demanded by the shareholders. The shareholders--who may be geographically scattered--may elect directors, who in turn choose executives to effectively manage the company on behalf of the shareholders. Therefore, the executives must be responsible for pursuing the shareholders? profit with the most prudential fiduciary duty. Moreover, management executives, as the shareholders? trustees, must be fully accountable to the shareholders for their actions.The Corporate Governance Committee of the Corporate Governance Forum of Japan has formulated a set of principles to guide the future evolution of corporate governance in Japan. This is an Interim Report of the Committee.The principles listed herein are designed as a two-step formula for realizing effective corporate governance: -- Principles that should be adopted in approximately five years, along with legal reforms, are quot;Step A Principlesquot; and are indicated as [Principle A]. -- quot;Step B Principlesquot; are those which should be aimed for in the early 21st Century, are necessary (with amendments) to illuminate the path toward the globalized market, and which require legal reforms on a grand scale. They are indicated as [Principle B]