Remuneration for Directors

Remuneration for Directors

Under the Companies Act, when granting remuneration, etc. to directors, it is necessary either to:
1. Stipulate the statutory matters (the matters listed in Article 361 of the Companies Act) in the Articles of Incorporation (rare case)
or
2. Pass the resolution of the statutory matters at general shareholder meeting
or
3. Acquire the consents of all shareholders of the statutory matters .
【 Skip to the conclusion 】

The main reason of existence of such provision is that there is a risk that directors will estimate their own remuneration too high if they are allowed to determine it by themselves.
Therefore, without following the process, the directors do not have a right to claim remuneration from the company, and even if they do receive, they may be required to return it (or pay the damages) to the company.  
Please be sure to pass such resolutions when paying remuneration to directors. 
*Even if the remuneration was paid without a resolution of the shareholders’ meeting, the benefit can be made retroactively effective if a resolution is passed at a later date.

What is the scope of “Remuneration”?

“Remuneration” refers to property benefits received from the company as compensation for the directors’ performance of their duties, such as “bonuses”, “retirement benefits”, “provision of company housing”, etc.

Directors who are also employees of the company

In cases where a director concurrently serves as an employee of the company (e.g., general manager, section manager, factory manager, branch manager, etc.), the employee’s salary portion must be excluded from the remuneration that is to be determined at the shareholders meeting, since those salaries are not not paid as “compensation for the directors’ performance of their duties”.
Therefore, it is necessary to state that the employee salary portion is not included in the remuneration of directors in the resolution to be adopted at the general meeting of shareholders.
E.g.,) “Monthly remuneration of Director ●● shall be XXX JPY (excluding the employee’s salary), effectively as on ●●.”

*While salaries for employees are naturally deductible, there are some requirements to be met in order to include remuneration for directors in deductible expenses.
Please consult your tax accountant for more details on the tax deductibility.

Resolution of the General Meeting of Shareholders and Delegation to the Directors/ Board of Directors.

While the excess remuneration of directors need to be prevented, the privacy of not publishing one’s remuneration shall also be protected. Therefore, it is feasible for shareholders to determine the total amount of remuneration at the general shareholder meeting and let Directors/ Board of Directors to determine the specific amount of remuneration to be distributed. (It is also feasible for Board of Directors to re-delegate to a Representative Director.)

NOTE: The resolution to determine the remuneration for auditors is treated differently from the directors. For auditors, the resolution must be made separately from the directors’, and after the total amount of remuneration is determined at the shareholder meeting, it is the auditors who can determine the specific amount of remuneration to be distributed.

With regard to retirement benefits, if there are rules and regulations governing retirement benefits for directors, it is not necessary to present a total nor specific amount in the resolution of the general meeting of shareholders. Thus, when a resolution is passed to the effect that such benefits will be paid in accordance with such rules, the specific amount, payment date, etc. can be left to the Board of Directors’ determination.

Reduction of director’s remuneration

Once the amount of remuneration for directors is determined in the Articles of Incorporation or at a general shareholders’ meeting, the directors have the right to demand remuneration from the company, and such amount becomes the “content of the contract” between the company and the directors. Therefore, any subsequent reduction or elimination of the amount of such remuneration requires the consent of the directors and the resolution of reducing/ eliminating the amount of remuneration without the consent is considered as invalid.

On the contrary, there is a precedent which states that such reduction is valid when a director’s position changes during his/her term of office and when it was clear that the amount of remuneration was tied to their position in the company. This is because it is possible for the director to predict that the amount of remuneration would be reduced.

Conclusion

The company shall either stipulate in the Articles of Incorporation or pass the resolution at the general shareholders meeting to grant remunerations to directors.

When the total amount of remuneration is determined at the meeting, it is allowed to delegate directors/ Board of Directors to determine the specific amount to be distributed

In principle, once the remuneration of directors is set in the Articles of Incorporation or determined at the general shareholders meeting, the consent of the directors is required to reduce/ eliminate the said remunerations.

MK @ 06/02/2022