Board of Directors in Japanese Corporate Law: Their Role and Operation

In Japan, the Board of Directors is an extremely important institution at the core of corporate governance for joint-stock companies. Its role is multifaceted, forming the foundation that supports the healthy growth and sustainable development of a company, from determining management policies to supervising daily business operations, and even selecting the representative director. The Board of Directors is a decision-making body established to concretize the company’s operational policies and fulfill the supervisory function of management. It functions not only to pursue efficient business execution but also to fulfill broader corporate governance objectives such as compliance with laws and regulations, prevention of misconduct, and protection of shareholder interests. This article explains the legal framework of the Board of Directors as defined by the Japanese Companies Act, its principal authorities and operational procedures, and the important principles concerning the responsibilities of directors. Additionally, through Japanese case law, we will introduce concrete examples of legal interpretations in the practice of the Board of Directors and touch upon the personalityistics of the Board in various institutional designs. We hope this article will serve as an aid in deepening the understanding of corporate governance in Japan.  

The Legal Basis and Mandatory Establishment of the Board of Directors in Japan

The Japanese Companies Act clearly stipulates the establishment of a board of directors as an organ of a joint-stock company. In some cases, the establishment of a board of directors is legally mandated. For example, public companies are required to have a board of directors (Companies Act, Article 327, Paragraph 1). A public company refers to a company that has not set forth in its articles of incorporation any provisions restricting the transfer of all or part of its issued shares. Such companies, which raise funds broadly from a large number of shareholders, are particularly required to ensure transparency in management and to strengthen supervisory functions, hence the mandatory establishment of a board of directors.

Furthermore, companies that adopt specific organizational designs, such as companies with a board of corporate auditors, companies with an audit and supervisory committee, and companies with a nominating committee, etc., are also required to establish a board of directors (Companies Act, Article 327, Paragraph 1). These organizational designs are chosen to build a more sophisticated corporate governance structure in accordance with the size and nature of the company’s business. The requirement for companies with specific organizational designs to establish a board of directors is not merely to fulfill a formal legal requirement. It is because, for companies that grow larger or have more complex management structures, it is essential to enhance transparency, fairness in management, and to improve external credibility with shareholders and the market, as well as to strengthen governance. The law demands a more robust supervisory system in response to the growth stage and personalityistics of a company, and the board of directors is considered to play a role in maintaining investor protection and the integrity of the market. Article 1 of the Companies Act states that, except where special provisions are provided by other laws, the establishment, organization, operation, and management of a company shall be governed by the provisions of the Companies Act, and the obligation to establish a board of directors is also based on this fundamental principle.  

The Key Roles and Authorities of the Board of Directors Under Japanese Corporate Law

The Board of Directors holds a variety of crucial roles and authorities in the management of a corporation in Japan. Its primary functions include decision-making related to the execution of company business, supervision of the performance of directors’ duties, and the appointment and dismissal of the representative director (Japanese Companies Act, Article 362, Paragraph 1).  

Firstly, the Board of Directors makes decisions on the “execution of company business.” Article 362, Paragraph 2 of the Japanese Companies Act specifies certain important matters such as the disposition and acquisition of significant assets, incurring substantial debt, the appointment and dismissal of managers and other key employees, the establishment, alteration, or abolition of branches or other significant organizational structures, the issuance of corporate bonds, and the establishment of systems to ensure that the execution of directors’ duties complies with laws and the articles of incorporation (internal control systems), as items to be decided by the Board of Directors. These matters significantly impact the operation of the company, thus requiring careful deliberation and decision-making by the Board. The specific enumeration of these “important business executions” is intended to promote more objective and cautious decision-making through discussion and resolution by the collective body of directors, rather than leaving it to the discretion of individual directors, thereby diversifying risk.

Next, the Board of Directors supervises the “performance of directors’ duties.” This involves checking whether each director is performing their duties appropriately in accordance with laws, the articles of incorporation, and the decisions of the Board of Directors, which is a vital function for ensuring the sound operation of the company (Japanese Companies Act, Article 362, Paragraph 1). Mutual supervision among directors helps prevent misconduct and strengthens corporate governance. This supervisory function acts as a safety net to continuously check that decisions are being executed properly and to prevent fraud or inappropriate judgments.

Furthermore, the Board of Directors is responsible for the “appointment and dismissal of the representative director” (Japanese Companies Act, Article 362, Paragraph 1). Since the representative director plays a critical role in executing the company’s business and representing the company, their appointment and dismissal are extremely important authorities for the Board of Directors.  

Through these roles, the Board of Directors contributes to enhancing corporate value and reducing management risks. The fact that the Board’s authority is composed of two pillars, “decision-making” and “supervision,” indicates that it balances both the offensive (decision-making) and defensive (supervision) aspects of management, thereby constructing a system where the company can grow sustainably while managing risks appropriately. The separation and coordination of decision-making and supervision are the core of the Board of Directors system under Japanese corporate law and are considered mechanisms that support sound corporate governance.

The main roles and authorities of the Board of Directors are summarized in the table below.

Operation and Procedures of the Board of Directors

For the Board of Directors to fulfill its functions appropriately, it is essential to comply with the operational procedures stipulated by the Companies Act of Japan. These procedures are not merely for the smooth conduct of meetings but also serve as a crucial mechanism to ensure the supervisory function of the Board and, consequently, to clarify the responsibilities of the directors.

Firstly, the “convening procedures and notice” are fundamental to the holding of a Board meeting. In principle, any director can convene a Board meeting (Companies Act, Article 366, Paragraph 1). The notice of convening must be issued to each director and each auditor with operational auditing authority at least one week before the day of the Board meeting (or within a shorter period if prescribed in the articles of incorporation) (Companies Act, Article 368, Paragraph 1). However, if there is unanimous consent from all directors (excluding directors who are audit & supervisory committee members in companies with such committees) and auditors, it is possible to hold a meeting without the convening procedures (Companies Act, Article 366, Paragraph 2; Article 368, Paragraph 2). Strict adherence is required as the absence of a convening notice or a setting that makes attendance difficult could invalidate the resolution. The rigor of the convening notice ensures that all directors can consider the agenda in advance and come to the meeting well-prepared, thus laying the groundwork for appropriate decision-making.

Next, the “creation and storage of minutes” are extremely important for the transparency and accountability of the Board of Directors. Minutes must be created for the proceedings of the Board of Directors as prescribed by the Ministry of Justice (Companies Act, Article 369, Paragraph 1). The minutes require the signatures or seal impressions of the attending directors and auditors, and those who do not record an objection are presumed to have agreed to the resolution (Companies Act, Article 369, Paragraphs 3 and 5). The minutes serve as evidence of the company’s decision-making and play a crucial role in the event of future disputes or accountability. The obligation to record objections in the minutes is a means of self-defense for directors to clarify their opinions and to avoid being held responsible for inappropriate resolutions later on, as well as evidence that the company’s decision-making process is transparent.

Finally, the “reporting obligation of directors” is essential for the Board of Directors to effectively perform its supervisory function. The representative director and directors in charge of business execution must report on the status of their duties to the Board of Directors at least once every three months (Companies Act, Article 363, Paragraph 2). This reporting obligation allows the Board to understand the progress of business and the presence of risks, enabling appropriate decision-making and supervision. Failure to fulfill the reporting obligation could result in the directors being held accountable. Regular reporting obligations provide an information foundation for the Board to constantly monitor the status of business execution and to respond swiftly in the event of problems. These procedures are indispensable elements supporting the sound operation and accountability of the Board of Directors and are understood not as mere formalities but as important legal requirements to enhance the effectiveness of governance.

Institutional Design and the Role of the Board of Directors Under Japanese Corporate Law

Japanese Corporate Law allows for flexible institutional design tailored to the size and personalityistics of a company, with three main patterns as follows. Depending on the institutional design, the role and authority of the board of directors also differ.

Companies with a Board of Corporate Auditors

In companies with a Board of Corporate Auditors, one of the most common institutional designs in Japan, the Board of Directors is responsible for making business execution decisions and supervising the performance of directors’ duties as stipulated by Article 362, Paragraph 1 of the Japanese Companies Act. Corporate auditors are appointed by the shareholders’ meeting and are tasked with auditing the execution of duties by directors and accounting advisors. They have the authority to audit the fulfillment of directors’ duties of care and loyalty, check for any violations of laws or the articles of incorporation, and, if necessary, report to the Board of Directors or file a claim to stop illegal activities. This complements and strengthens the supervisory function of the Board of Directors through the work of the corporate auditors. In companies with a Board of Corporate Auditors, at least three directors must be appointed as per Article 331, Paragraph 5 of the Japanese Companies Act.  

Companies with Audit and Supervisory Committees

Companies with Audit and Supervisory Committees in Japan have an organizational design that strengthens the management oversight function by establishing an Audit and Supervisory Committee within the board of directors. The Audit and Supervisory Committee must be composed of three or more directors, with the majority being external directors, as stipulated by Article 331, Paragraph 6 of the Japanese Companies Act. The duties of the directors who are members of the Audit and Supervisory Committee include auditing the execution of duties by directors, preparing audit reports, and deciding on proposals to be submitted to the shareholders’ meeting regarding the appointment and dismissal of accounting auditors, as outlined in Article 399-2, Paragraph 3 of the Japanese Companies Act. Directors who are members of the Audit and Supervisory Committee must attend board meetings and express their opinions when deemed necessary (Japanese Companies Act, Article 399-2, Paragraph 3), and must report to the board of directors without delay if they discover any misconduct (Japanese Companies Act, Article 399-4). This system aims to enhance management transparency and gain the trust of shareholders and investors.

Companies with Nominating Committees in Japan

In Japan, companies with nominating committees, audit committees, and compensation committees establish these three committees within their board of directors to clearly separate executive operations from supervisory functions. In this structure, the board of directors decides on the basic management policies and supervises the execution of duties by executive officers, while individual directors generally do not engage in business execution (Japanese Companies Act, Article 415 and Article 416) . Business execution is entrusted to ‘executive officers’ appointed by the board of directors (Japanese Companies Act, Article 402, Paragraph 1, and Article 418) .  

• The nominating committee determines the content of proposals for the appointment and dismissal of directors to be submitted to the shareholders’ meeting (Japanese Companies Act, Article 404, Paragraph 1).  
• The audit committee audits the execution of duties by directors and executive officers and prepares audit reports (Japanese Companies Act, Article 404, Paragraph 2).  
• The compensation committee decides on the individual compensation details for executive officers and others (Japanese Companies Act, Article 404, Paragraph 3).  

This system aims to thoroughly separate ownership from management, achieving both transparency in management and swift decision-making. The Japanese Companies Act allows for multiple institutional designs to provide flexibility in building the optimal corporate governance structure in response to the diverse needs of companies (such as size, business content, and awareness of governance). While the company with statutory auditors is the most traditional and easily applicable to small and medium-sized enterprises, companies with committees such as audit and nominating committees are evolving to enhance management transparency and the independence of supervisory functions to gain trust from large-scale enterprises and international investors. In particular, the thorough separation of ownership and management in companies with nominating committees is a clear indication of the intent to achieve more objective and stringent governance by focusing the board of directors on supervision rather than business execution. This emphasizes the aspect of the legal system as a strategic option, allowing companies to choose the governance model that best suits their personalityistics.

The personalityistics of the board of directors in different institutional designs are summarized in the table below.

Summary

The Board of Directors under Japanese Corporate Law is an essential institution for supporting the sound management and sustainable growth of a company. Its roles range from making decisions on important business executions to supervising the performance of directors’ duties, and even to the selection of the representative director. Japanese Corporate Law clearly defines the detailed procedures for fulfilling these roles, the obligations that directors should bear, and the principles regarding their responsibilities. Additionally, case law on the business judgment rule and the duty of oversight demonstrates that while the law pursues directors’ responsibilities, it also emphasizes a balance that respects the freedom of management. The diverse organizational designs, such as companies with a Board of Corporate Auditors, Audit & Supervisory Committees, and Nomination Committees, enable the construction of optimal corporate governance systems tailored to the size and personalityistics of the company, forming the foundation for Japanese companies to continue being trusted entities in the international community. It is evident that the role of the Board of Directors is not merely to fulfill legal obligations but also to serve as a strategic element in ensuring the company’s sustainable growth and international credibility.

Monolith Law Office possesses deep expertise and a wealth of experience in Japanese Corporate Law, particularly in corporate governance. We provide a wide range of support, from selecting the optimal institutional design for a company, legal advice on the operation of the Board of Directors, risk management concerning directors’ responsibilities, to complex legal issues associated with mergers and acquisitions (M&A) and business reorganization.