Governance Structures

03/09/2025

The Companies Act requires companies to establish certain mandatory bodies for decision-making and monitoring. When evaluating a particular company, it is important to check which structure the company has adopted. For TSE-listed companies, there are three possible structures:
Corporate Auditor Structure
Three-Committee Structure
Audit Committee Structure

Corporate Auditor Structure

This is the traditional governance structure for publicly listed companies in Japan.

Popularity

Approximately 60% of TSE-listed companies adopt this structure.

Role of Board

Under this structure, the Board of Directors is intended to function as both a management and monitoring body. To ensure that the business operates in a proper and compliant manner, Corporate Auditors are appointed by the shareholders to establish a Board of Corporate Auditors (explained below and also at Corporate Auditors).

Board composition

In the past, there was no requirement to appoint independent directors, as Corporate Auditors were expected to fulfill that role. However, over the years, the Companies Act and the Tokyo Stock Exchange (TSE) rules have introduced requirements to appoint a certain number of external directors to enhance the monitoring function within the Board of Directors.

Today, the Companies Act requires listed companies with a Corporate Auditor Structure to appoint at least one “Outside Director” (explained below). In addition to directors, the Companies Act requires at least 50% of the members of the Board of Corporate Auditors to be “Outside Corporate Auditors”.

In addition to the minimum requirements under the Companies Act, the Corporate Governance Code imposes the following ‘comply-or-explain’ requirements on TSE-listed companies:

Companies listed on the Prime Market: At least one-third of directors must be “Independent Outside Directors” (explained below).
Companies listed on the Standard Market or the Growth Market: There must be at least two “Independent Outside Directors”.

As these are comply-or-explain requirements, a company may choose not to comply by providing an explanation for its decision to opt out. Key Laws, Regulations and Guidelines)

“Outside Director” and “Independent Outside Director”

The definition of “Outside Director” in the Companies Act is complex but aims to exclude individuals who serve as executive directors, officers or employees of the company or its affiliates. In certain cases, it also excludes those who have previously held such positions, as well as certain family members.

The definition of “Independent Outside Director” in the TSE rules further excludes executives of the company’s primary customers and suppliers, as well as consultants and professional advisors who receive substantial fees from the company.

Board-reserved matters

Under this governance structure, the range of management decisions requiring approval from the Board of Directors is broader than in the other two structures. Matters reserved for the board cannot be delegated to a subordinate body or individual, including the Representative Director (explained below). This characteristic has resulted in an actual or perceived lack of promptness in decision-making under this structure.

Representative Director

Under this governance structure, a company must appoint one or more Representative Directors from its directors. Each Representative Director has extensive authority to legally represent and bind the company.

The Board of Directors has the power to appoint, remove, and supervise the Representative Director(s), with all material decisions reserved for the Board. However, in practice, the power of Representative Director is quite strong. The past legal reforms have aimed to strengthen external oversight by requiring the appointment of “Outside Directors” and enhancing the power and independence of Corporate Auditors (see below).

Board of Corporate Auditors

The role of the Board of Corporate Auditors is to monitor the management from a compliance perspective. Members are appointed by shareholders’ resolutions and serve a term of four years. The minimum number of members is three, and at least 50% of them must be “Outside Corporate Auditors”. Corporate Auditors have the right to attend meetings of the Board of Directors, although they do not have voting rights. While they do not directly appoint, remove, or supervise management, they have various powers to investigate corporate affairs.

(Corporate Auditors)

Three-Committee Structure

This is a variation of the US/UK-style governance structure, introduced in 2002 to enable companies to adopt a framework that is more familiar to international investors.

Popularity

Less than 3% of TSE-listed companies adopt this structure.

Role of board

Under this structure, the Board of Directors is designed to serve as a monitoring body. It is responsible for appointing the CEO and other executive officers, and the members of the nomination, remuneration and audit committees.

Board composition

Under this structure, the Board of Directors appoints the members of the three committees. The Companies Act stipulates the following requirements:

all committee members must be directors;
each committee must consist of at least three members; and
a majority of each committee must be composed of “Outside Directors” (explained above).

Since directors are permitted to serve on two or three committees simultaneously, a company can meet these requirements with a minimum of two Outside Directors.

Like the other two structures, in addition to the minimum requirements under the Companies Act, the Corporate Governance Code imposes the following ‘comply-or-explain’ requirements on TSE-listed companies :

Companies listed on the Prime Market: At least one-third of directors must be “Independent Outside Directors” (explained above).
Companies listed on the Standard Market or the Growth Market: There must be at least two “Independent Outside Directors”.

As this is a comply-or-explain requirement, a company may choose not to comply by providing an explanation for its decision to opt out. Key Laws, Regulations and Guidelines)

Board-reserved matters

Unlike the Corporate Auditors Structure, the board can delegate a broad range of management responsibilities to executive officers.

Executive Officers

Under this structure, rather than appointing Representative Director(s) (explained above), the board appoints at least one Executive Officer. If the board appoints two or more Executive Officers, it must designate at least one as a Representative Executive Officer. A Representative Executive Officer has extensive authority to legally represent and bind the company.

A director may concurrently hold both a director role and an executive officer role unless they are a member of the Audit Committee.

Nomination Committee

The Nomination Committee is responsible for determining proposals regarding the appointment and removal of directors for shareholder votes. It is important to note that the board does not have the power to reject the committee’s proposals. On the other hand, the board has the authority to appoint and remove executive officers.

Remuneration Committee

The Remuneration Committee is responsible for determining the compensation, bonuses, and other payments and benefits for directors and executive officers, including stock options and retirement allowances. If an executive officer also serves as an employee of the company, the committee will determine their compensation in that capacity. Unlike the other two structures, the shareholders of a Three-Committee Structure company do not have the authority to approve director remuneration.

Audit Committee

The Audit Committee is responsible for overseeing the actions of directors and executive officers through the internal control system established by the board, ensuring both legality and appropriateness. The committee prepares an audit report for each fiscal year. It is also responsible for determining proposals regarding the appointment and removal of the accounting auditor for shareholder votes.

Audit Committee Structure

This structure is a hybrid of the Corporate Auditor Structure and the Three-Committee Structure, introduced in 2014. Under this structure, an Audit Committee is established within the Board of Directors, replacing the traditional Board of Corporate Auditors.

Popularity

The number of companies adopting this structure has been increasing and is now close to 40% of TSE-listed companies.

Role of board

This structure provides the Board of Directors with greater flexibility in balancing its monitoring and management roles.

Board composition

Under this structure, three or more directors are appointed as members of the Audit Committee, with a majority of the committee members required to be “Outside Directors” (explained above). There are statutory mechanisms aimed at ensuring the independence of the Audit Committee, including a longer term of two years for its members (compare to a one-year term for other directors under this structure) and a requirement for the Board to obtain the Audit Committee’s consent before proposing any member candidates for shareholder votes.

Companies listed on the Prime Market: At least one-third of directors must be “Independent Outside Directors” (explained above).
Companies listed on the Standard Market or the Growth Market: There must be at least two “Independent Outside Directors”.

As this is a comply-or-explain requirement, a company may choose not to comply by providing an explanation for its decision to opt out. Key Laws, Regulations and Guidelines)

Board-reserved matters

Unlike the Corporate Auditors Structure, the board can delegate a broad range of management responsibilities to a Representative Director or another director if: (i) a majority of the board members are Outside Directors; or (ii) the Articles of Incorporation permit such delegation.

Representative Director

Like the Corporate Auditor Structure, a company must appoint one or more Representative Directors from its directors. Each Representative Director has extensive authority to legally represent and bind the company.

It is important to note that members of the Audit Committee cannot be appointed as an executive director.