by Noriyuki Morimoto
External directors are recognized as key players in corporate governance reform. But given that they are neither insiders nor experts in the company’s business, what is the significance of involving outsiders in top management decisions? In other words, what is the role of amateurs in governance? This question is about the kind of contribution they can make to management, or the actual experts in the business.
It seems that at least three things are expected of amateurs in governance.
The first is to determine whether there are any defects in the company’s procedures. A layperson in management may not be able to make judgments on the content of the business, but a legal expert, for example, can make judgements regarding its formalities. This is probably the reason why quite a few external directors are lawyers.
The second is to provide a broad, high-level perspective to make a comprehensive evaluation of the logical consistency and adequacy of the plans developed by the executive team. While it is impossible for a layperson to surpass the knowledge of experts in a business, the layperson should often be able to provide useful advice to the experts by holding a neutral position and having a broad, albeit shallow, knowledge of the business and its area of expertise.
The third is increased transparency. The executive department, as the expert, would be obliged to devise methods and materials to explain the business to the layperson. This would serve as a deterrent against biased judgments and actions inherent to the expert, and at the same time, would have the effect of increasing management transparency.
However, the execution of business operations in the management of a company must be entrusted to the chief executive, who is an expert: the CEO is the one who is entrusted with the execution of business operations. The intervention of layperson governance in this management function is not tolerated. This is not just a matter of corporate management. Generally speaking, to maintain order in and develop the society, everyone should identify their own expertise and speak and act with confidence in that area, while in other areas, in which other people excel, one should act with respect to their expertise.
What, then, is the expertise of an external director, a layperson in the business? It is nothing more than serving as a wise individual with common sense and a broad perspective.
[Category /Corporate Governance]
Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.