Why Simply Adding Outside Directors Doesn’t Work
Many executives believe that appointing three outside directors guarantees solid governance. Trusting this idea, they often install acquaintances or executives from partner companies into these roles.
However, an interview with Tsutomu Fujita on finance.biggo.jp sounds an alarm against this “check-the-box” approach to governance. Fujita points out that “Japan is an activist’s paradise,” arguing that the presence of a “conductor” is more critical to corporate value than the number of outside directors.
This “conductor” theory offers profound insights for designing governance in small and medium-sized enterprises (SMEs).
The Essence of Governance, Explained Through an Orchestra
Using Fujita’s metaphor, a company is like an orchestra. Even if the violins (sales), trumpets (R&D), and timpani (accounting) each play their sheet music (tasks) perfectly, without a conductor, there is no music (corporate value).
What often happens in SMEs is that each section plays its own tune without a “conductor.” Increasing the number of outside directors doesn’t help if they don’t function as conductors; it just adds more overseers.
A New Path Forward: METI’s “Family Governance Guidance”
In parallel with this discussion, Japan’s Ministry of Economy, Trade and Industry (METI) released its “Family Governance Guidance.” According to an article on Sustainable Japan, this guidance aims to “promote corporate growth” and its adoption is voluntary.
Notably, this guidance is specifically tailored for “family businesses.” Most SMEs are family-run, where ownership and management are often not separated. Here, the role of the “conductor” is paramount.
The Conductor’s Dilemma in Family Businesses
In family-run companies, the founder or their descendants often act as the “conductor.” However, this means the conductor wears three hats: “shareholder,” “manager,” and “family member.”
Governance breaks down when these three roles conflict. “Family interests” can distort “management decisions” and harm “shareholder value.” This is the unique governance challenge of family businesses.
METI’s guidance offers a framework for addressing this dilemma: “clarify the family’s values and determine how to reflect them in management.” It’s not just about rule compliance; it asks what philosophy the “conductor” uses to lead the orchestra.
3 Actions SMEs Should Take Right Now
So, how can you apply this “conductor” theory to your own company’s governance? Based on my experience supporting over 38 companies, here are three concrete actions.
Action 1: Seek “Conductor” Qualities in Outside Directors
When selecting outside directors, don’t just choose them because “they’re an acquaintance” or “they know the industry.” You should seek the ability to “see the entire orchestra and balance the volume of each section.”
Specifically, ask these questions during interviews:
– “In our business portfolio, which business do you think we should concentrate our management resources on?”
– “If the sales and R&D departments have conflicting opinions, what criteria would you use to mediate?”
Someone who can answer these questions in a way that aligns with your company’s vision is a person who can function as a “conductor.”
Action 2: Document Family Values as a “Constitution”
What METI’s guidance suggests is the importance of making family values “visible.” Specifically, document them in the form of a “Family Charter” or “Business Succession Basic Policy.”
This document should include:
– The purpose of the business (why we continue this company)
– The scope of family involvement (which positions family members can hold)
– The use of profits (dividends vs. reinvestment)
– Succession rules (criteria for selecting successors)
The process of deciding these things itself serves as “governance practice” that prevents future conflicts within the family.
Action 3: Conduct Regular “Conductor Reviews”
Once a year, set up a meeting with an external third party to evaluate whether the current “conductor” is functioning properly. This is different from a board self-evaluation; it focuses specifically on the performance of the CEO or president *as a conductor*.
Evaluation criteria include:
– Are they effectively mediating opinions from different departments?
– Are they sensing changes in the business environment and adjusting the orchestra’s overall direction?
– Are they balancing shareholder (family) interests with management decisions?
Conducting this review helps determine if it’s time for a “conductor” change or if the support system needs strengthening.
A Culture of Cultivating Conductors Enhances Corporate Value
What Fujita’s insights and METI’s guidance have in common is the idea that governance is not just about “systems” but also about “people” and “culture.”
It’s not the number of outside directors or the thickness of the compliance manual that determines corporate value. It’s the presence of a “conductor” who can see the whole organization and create harmony.
What SME leaders need to do is design a system, tailored to their company’s size, for cultivating, evaluating, and, when necessary, replacing this “conductor.”
At a time when the quality of corporate governance is being questioned beneath the surface of rising stock prices, isn’t it time to move beyond box-ticking governance and invest in cultivating a true “conductor”?
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