Duties of Directors ①

A mandatory organ of all stock companies in Japan

Directors are a mandatory organ in all Japanese stock companies (other mandatory organs are (1) a general meeting of shareholders and
(2) a representative director).
In principle, establishment of other organs (such as auditors) are optional.

Roles of Directors

The roles of directors vary depending on whether the Company has Board of Directors (BoD) or not.

Roles of directors of a company WITHOUT a BoD:

(a) When there is more than one director, “decisions regarding the execution of the operations of the Company” are made by a majority decision of the directors.
*If there is only one director, he/she makes the decisions.

(b) Each director has the authority to “execute the operations of the Company”.

(c) Unless otherwise the Articles of Incorporation or a general meeting of shareholders designate a representative director, all directors have the right to represent the company in principle.

Roles of directors of a company WITH a BoD*

(a) Decisions regarding the execution of the operations of the Company are made by resolution of a BoD.

(b) All directors have duties of “supervising the execution of the duties” by directors

(c) A BoD selects and dismisses representative directors.
*In principle, the establishment of a BoD of a private company is optional.

A definition of “decisions regarding the execution of the operations of the Company”

Japanese law does not clearly define the scope of “execution of operations of the Company” which the directors should make a decision on. Japanese law is often vague on this important point (it can be said that Japanese law is broad enough to allow for various corporate forms), and thus, sometimes confuse our clients who are not accustomed with Japanese business culture in particular.

However, the “decisions regarding the execution of the operations of the Company” is generally understood to refer to the overall planning and scheduling of the company’s management and operations, including such as the preparation of plans on business plans, on budget plans, preparation of internal regulations, and making decisions on convening general meetings of shareholders.

In some countries, prior approval by the general meeting of shareholders is required before executing a business plan. In contrary, for most of the Japanese companies, specific business plans are prepared by the directors, and shareholders receive an “after-the-fact report” on the results of their execution at the annual general meeting of shareholders.

It is important to note that in a company without a BoD, the general meeting of shareholders also has the authority to make decisions on business execution.

Therefore, if shareholders wish to stipulate those certain matters to require the prior approval of the general shareholders meeting, such company can either establish internal regulations to that effect (*1) or list the specific decision-making authority of the general shareholders meeting in the Articles of Incorporation (*2).

Anyhow, when the shareholders pass the resolution of electing a specific director implies that they have given a certain degree of authority to him/ her to manage the company, so the resolution to appoint directors must be carefully passed, and if a director fails to deliver results for the company, it is necessary to carefully decide whether to dismiss or reelect him.

*1) It is advisable to stipulate that the preparation and revision of internal rules and regulations shall be made by the general meeting of shareholders, since such preparation and revision are made by the directors in principle.

*2) No special provision may be necessary for the matters which the shareholders meeting have decision making authority under the Companies Act, in the first place (e.g., for amendments to the Articles of Incorporation, etc.).

Is it necessary for a majority of directors or the BoD to make all business execution decisions?

Not all business execution decisions need to be made by a majority of the directors nor by the BoD. For example, it is not practical for a company with assets exceeding 400 million JPY to convene a meeting of the BoD every time it needs to borrow 1 million JPY from a financial institution. In such a case, it is allowed to delegate the decision to a subordinate body, such as a representative director or a particular executive director.

On the other hand, it should be noted that such delegation of decision making may not be allowed for certain matters as stipulated in the Companies Act.

For example, if the amount of borrowing as described above constitutes a “significant amount of borrowing” for the company, a decision by the BoD (or by a majority of the directors) is required. Yet, the criteria for “how much is a significant amount and how much is not” depends on the size of the company. In this case, if the company wishes to establish clear criteria, it may, for example, prepare a “regulation of the BoD” or a “regulation of decision-making authority”, which stipulates that “a resolution of the BoD is required when the amount of borrowing exceeds XXX JPY”.

A definition of “executing the operations of the Company”

While the meaning of “decisions regarding the execution of the operations of the Company” is unclear, the definition of “executing the operations of the Company” will also be unclear.  

The execution of the operation of the company is, for example, each director takes charge of a part of the business plan which they have created and gives specific instructions to subordinates and employees (inward business execution), while using outside services when necessary (outward business execution) to put the plan into action.

In a company without a BoD, all directors have this authority, but in a company with a BoD, only the representative director has executive authority.

In other words, in principle, the main role of directors of the company with a BoD, other than the representative director is to attend, express opinions, and vote on resolutions of the board of directors (and to monitor whether execution operations are going well). In practice, however, it is often the case that directors are given the authority to execute business affairs by a resolution of the BoD, and that the said directors also have the authority to execute business affairs. Therefore, in a company with a BoD, there are (A) representative directors who always have the authority to execute business affairs, (B) directors who are granted the authority to execute business affairs (“executive directors”), and (C) directors who do not have the authority to execute business affairs (“ordinary directors”).

Difference between business execution and representative authority

In a company without a BoD, each director has the authority to “execute the operations of the Company ” and, unless a specific representative director is appointed, all directors have “representative authority”.
So, what is the difference between “authority to execute business affairs” and “authority of representation”?

The power of representation specifically refers to the authority to enter into contracts with third parties outside the company in the course of executing business, or to represent the company in litigation in the event of a lawsuit against the company.
As a general rule, if a contract has the name of the representative director and the company seal affixed, it is considered an act done “as a company” and not as an act done by the representative director personally.
That is why all company need to be very careful in handling the corporate seal. (Although, it is permissible to have it kept or sealed by a subordinates or a third party).

Flow of business execution from decision-making to exercise of representative authority

MK @ 05/08/2022