Views on improving the integrity of global capital markets
02 September 2015

CorpGov Roundup: Toshiba Scandal Shows Work Remains in Japan, US Proxy Access

Although much of the Northern Hemisphere goes on vacation in August, we do not — well we do, but only for a short time — so here is an admittedly small number of corporate governance highlights from the past month that include the European Securities and Markets Authority’s (ESMA) final report on the role of the proxy advisory industry, Japan’s need for continued corporate governance work in light of the Toshiba accounting scandal, and data that concludes US board members are getting older.

European Union

ESMA has published the responses to a call for evidence it previously issued on the impact of the Best Practice Principles for Providers of Shareholder Voting Research and Analysis (BPP). The call for evidence aimed to collect data on stakeholders’ perception regarding how the most recent proxy seasons, and proxy advisers’ approaches, have evolved following publication of the BPP. The original suggestion for improved understanding and transparency of the role of service providers in the proxy research space arose from a recommendation from ESMA’s review of the industry during 2012. This led to the creation of the Best Practice Principles Group (BPPG), formed in February 2013 to promote greater understanding of the proxy research industry.

In ESMA’s Final Report and Feedback Statement on the Consultation Regarding the Role of the Proxy Advisory Industry, published 19 February 2013, ESMA concluded that:

“(I)t has not been provided with clear evidence of market failure in relation to how proxy advisors interact with investors and issuers. On this basis, ESMA currently considers that the introduction of binding measures would not be justified. However, based on its analysis and the inputs from market participants, ESMA considers that there are several areas, in particular relating to transparency and disclosure, where a coordinated effort of the proxy advisory industry would foster greater understanding and assurance among other stakeholders in terms of what these can rightfully expect from proxy advisors. Such understanding and assurance will help to keep attention focused where it belongs, namely on how investors and issuers can, from their respective roles foster effective stewardship and robust corporate governance, and ensure efficient markets. Consequently, ESMA considers that the appropriate approach to be taken at this point in time is to encourage the proxy advisory industry to develop its own Code of Conduct.”


The head of the Securities and Exchange Board of India (SEBI) urged investors to be more active in a recent speech. The speech by SEBI Chair U K Sinha urged investors to take an active role in governance, citing SEBI’s support for a number of investor associations. Sinha also called on institutional investors and mutual funds to adopt voting policies and disclose the outcomes of their votes, cited electronic voting advancements as a method for shareholders to get more involved, and he spoke about recent requirements concerning gender diversity on Indian boards of directors.


Much has been written in recent years about corporate governance developments in Japan. The county was seen as a corporate governance laggard for years — a fact not lost on Prime Minister Shinzo Abe and his government, who have attempted to push through corporate governance reforms in the hopes that such improvements will help attract capital to the country and improve the state of Japanese business.

It is therefore interesting and instructive to take a look at the current state of governance in Japan and the case of Japanese blue-chip company Toshiba, whose recent accounting scandal hints that companies may be publicly supporting popular governance changes, but not materially changing their internal governance.

News of the recent accounting scandal found that Toshiba had systematically fabricated its financial results, including overstating its profits by ¥156.2 billion ($1.26 billion) over a seven-year period from 2008 to 2014. According to an independent report, at monthly CEO meetings, strong pressure was placed on managers to meet unrealistic targets, with little oversight through an audit of accounting about how such targets were met. In short, Toshiba’s audit controls were not stringent enough to catch accounting tricks used by managers to meet their unrealistic targets.

Previously, Toshiba had been seen as progressing towards better corporate governance, including a western-style, one-tier board and more independent directors than is currently required by Japanese regulations.

However, the company’s audit committee chairman seemed to ignore repeated requests to review certain accounting treatments when they were raised as concerns. It also appears that the audit committee did not have enough members with financial expertise.

For more on this accounting scandal, check out two insightful blog posts from my colleague, Matt Waldron:

  1. Toshiba Accounting Scandal: Should Auditor Ernst & Young ShinNihon Get a Mulligan?
  2. Toshiba Scandal: Should Outgoing CFO Have Chaired the Audit Committee?

It appears that corporate governance improvements in Japan still have a long way to go.

New Zealand

No, your eyes don’t deceive you, New Zealand has made it into the corporate governance roundup two months in a row.

Last month we highlighted the launch of the New Zealand Corporate Governance Forum, and in August the forum officially released its corporate governance guidelines. The guidelines cover areas such as director independence, tenure, and board renewal; remuneration (both executive and nonexecutive); and reporting and disclosure. The guidelines also recommend new practices such as the right of shareholders to nominate directors, voting on a poll rather than a show of hands, and shareholder approval of share issues above 5% of total shares.

United States

To almost no one’s surprise, the boards at US companies are getting older, as highlighted by recent studies by executive recruiting firm Spencer Stuart and Ernst & Young’s EY Center for Board Matters. According to the Spencer Stuart report, about 40% of directors at S&P 500 companies are age 64 or older, up from only 33% in 2010, and 18% in 2005. The Ernst & Young report shows that about 20% of board members are older than age 68 and have served on a company’s board for more than a decade.

Elsewhere, the first reviews of the 2015 proxy season are starting to roll in, and the trends are becoming apparent, most notably that of proxy access. Proxy access refers to the ability of shareowners to place their nominees for director on a company’s proxy ballot. This right is available in many markets, though not in the United States. Read our report on proxy access in the United States.

According to Institutional Shareholder Services, there were about 120 proxy access shareholder proposals so far this year, accounting for about 11% of total proposal submissions. Average investor support thus far in 2015 for proxy access has been at about 54%. Expect more in the way of proxy access in 2016, including SEC guidance on dueling proxy access proposals when both companies and shareholders have submitted proxy access plans.

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Image Credit: YinYang

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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