IMPLEMENTING CORPORATE GOVERNANCE POLICIES – A PRACTICAL PERSPECTIVE
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→IMPLEMENTING CORPORATE GOVERNANCE POLICIES – A PRACTICAL PERSPECTIVE
IMPLEMENTING CORPORATE GOVERNANCE POLICIES – A PRACTICAL PERSPECTIVE
April 2024
One Asia Lawyers Group
Of Counsel
Lawyer, Canada(Quebec) / USA(CA)
Matthew Starnes
Recent reforms to the Japanese Corporate Governance Code[1] as well as changes to the Tokyo Stock Exchange have increased the importance of corporate governance for Japanese companies. This importance is also accentuated by the growing trend in North America and Europe for companies to put in place supplier codes of conduct that mandate compliance with ethical and governance standards in their suppliers.
This article sets out how corporate governance can be addressed and improved through company policies, as well as offer practical insights into how such policies can be put in place, especially in small to mid-size companies.
1. Company Policies as a key element of Corporate Governance
Corporate Governance is the system of rules, practices and policies by which a firm is directed and controlled. The most basic elements of corporate governance are set out in the laws of a company’s jurisdiction of incorporation. This basic level of legally required corporate governance can also come from the rules of the stock exchange for publically listed companies, as well as the laws of countries in which a company does business. Beyond this, Corporate Governance is understood to refer to the practices and policies that a Company adopts itself to govern its behavior.
One of the principle ways corporate governance is put in place is through corporate policies tailored to a company’s specific needs. Policies can not only be made enforceable on a company’s management and employees to guide their behaviour, they are often made publically available as a marker of a Company’s values and intentions.
Broadly speaking, a company’s policies to enact its corporate governance can be split into two categories; inward looking policies designed to ensure the company operates in accordance with the law and its values, and outward looking policies dealing with sustainability issues designed to ensure the company acts as a good corporate citizen in its dealings with third parties. The former include business ethics, conflict of interest and diversity policies while the latter can include policies like environmental policies and human rights policies.
2. Benefits of Company Policies
The goals of inward looking policies is to ensure employees and management act in the best interests of the Company and in accordance with its aims and values. They can be aimed both at limiting negative behaviours, like a conflict of interest policy to stop conflicts of interest that harm the company, to policies designed to promote desirable behavior, like increased diversity. These type of policies should be publicized internally and made known to all employees, often by reference in their employment contracts and managers can be required to sign them. This makes clear the company’s standards and, in cases where there are serious breaches, can be grounds for disciplinary action or even dismissal. In certain jurisdictions having a policy against bribery and corruption can be an important element of a defence if an employee acts illegally outside management’s knowledge.
Policies that deal with sustainability issues also have multiple benefits. Firstly, more and more companies, particularly in Western countries that Japanese companies may be selling products and services to, are instituting supplier codes of conduct that require their suppliers to adhere to certain ethical standards. In some countries, such as Canada, these are even legally required in certain areas such as no child labour. Most commonly, these supplier codes of conduct include prohibitions on slave labour or child labour by their suppliers as well as requirements to show the supplier is working to limit environmental impact and in particular green house gases. Having a corporate policy in place that addresses these issues can thus be a real competitive advantage in selling to buyers with a supplier code of conduct. Another benefit is that having these type of policies in place is a clear indicator of a company’s corporate values. This can be an aid in recruiting employees, particularly from the younger generations.
3. How to enact Company Policies
Enacting policies in some or all of these can seem like a daunting task that will take management’s time and focus away from more immediate day-to-day concerns. This can be particularly the case for small and medium companies that may not have an HR or PR team that can work on such policies. However, based on my experience as a director of two small to mid-size companies as well as member of senior management of larger companies I have seen how, approached in a systematic fashion, this process can be managed without diverting too much of managements focus and successfully applied.
A first step is to identify a few key people in the company to partake in this process. Ideally, this working group will start by setting out a corporate values and a mission. The mission should be a statement of the company’s goal, such as, “be the largest producer in South-East Asia” or, ““be a one of the industry’s lowest cost producers.” Values can be four or five simple statements of the guiding ethos of the company. These can be have both an ethical component such as “honesty,” or “transparency;” and a business one, such as “use leading edge technology,” or “focus on low-cost production.” These clear statements can serve as the basis of the corporate policies to be enacted.
The next step is to decide on the key policies to be covered. In many cases a Business Ethics policies makes a good initial policy. This can cover a broad range of key issues such as prohibitions on bribery, corrupt practices, and conflicts of interest while also promoting equality and diversity among other aspects.
A policy should clearly include certain elements: the objective and scope, who in the company has responsibility for the policy, who it applies to, and exactly what is covered by the policy. Setting out what the policy covers does not need lengthy drafting, it can be done in simple points. When it comes to drafting policies, there are multiple examples freely available as most companies post their policies on their web sites. While I do not suggest copying another company’s policies, looking at similar companies in the same industry or area can serve as a good point of inspiration. Once an initial draft of the policy has been prepared, as it will become an enforceable document, it is a good idea to have it reviewed by legal counsel to make sure it complies with any applicable laws and as a check on general drafting.
Once the policies have been finalized they should be formally adopted by senior management or the board. They can then be posted on the web site and referred to in employment contracts. They should be reviewed and updated periodically.
4. Conclusion
This paper sets out at a very high-level issues Japanese companies should consider in adopting company policies. We are happy to discuss in more detail if there are any questions and provide practical advice on how to put in place appropriate policies.
[1] Translated to English: b5b4pj0000046l0c.pdf (jpx.co.jp)
