What the Governance Revision Proposal Asks: “The Role of the Board of Directors” and What SMEs Can Learn

Translating Large-Company Governance Discussions into SME “Design”

The Financial Services Agency (FSA) has presented a revision proposal for the Corporate Governance Code. One focus is clarifying the role of the board of directors. Many SME owners who saw this news likely thought, “That’s for listed companies.” That’s true. However, stopping your thinking there is a missed opportunity. The “background” and “intended direction” of regulatory changes aimed at large companies are packed with hints for businesses of all sizes to achieve their corporate purpose.

The question is whether, in many SMEs, the “board of directors” has not become merely a formal body for legal compliance or a forum to rubber-stamp the president’s decisions. If so, governance is not functioning as a “higher-order management design concept.” Let’s use this revision discussion as a trigger to consider how to update your company’s decision-making forum into a powerful “engine” for business growth.

The Essence Revealed by “Role Clarification”: What is the Board of Directors For?

According to reports, the revision proposal aims to more clearly state that “the board of directors supervises the formulation and execution of strategy and plays a central role in appointing, evaluating, and determining compensation for management.” This is part of a trend to reposition the board from a mere monitoring body to an active institution for corporate value creation.

In SMEs, especially unlisted ones, board members are almost always substantially involved in management execution (the so-called “executive committee” model). This state itself is not necessarily bad. What’s important is being conscious of the function of the “forum.”

At one mid-sized company I supported, the board was seen as a “place to check the president’s unilateral decisions.” Discussions were always negative, and new business proposals were consistently rejected as “too risky.” As a result, business stagnated. This is a classic failure case of reducing “the role of the board” to mere “risk avoidance.”

Redefining the “Role of the Board” for SMEs Starting Today

So, how can you redesign it as an “engine”? Consider the following three options.

Option A: Maintain the Status Quo (Formal Approval Body)
Benefits: Low effort, appears fast-paced.
Drawbacks: Lack of diverse perspectives, accumulation of risk for major misjudgments. Concentration of burden on the owner-manager. Risk Level: 70–90 (High probability of major misjudgments affecting business continuity).

Option B: Evolve into a Forum Specializing in Strategic Deliberation
Benefits: Complements the owner-manager’s perspective, leads to more refined strategies. Can also serve as a forum for successor development.
Drawbacks: Requires skills in preparing materials and facilitating discussions in advance. Increases time cost.
Risk Level: 30–50 (Some initial confusion, but improves management quality in the medium to long term).

Option C: Establish a Parallel “Advisory Committee” for Regular External Insights
Benefits: Can identify blind spots internal teams miss. Expands networks.
Drawbacks: Requires compensation for external talent and setting boundaries for information disclosure.
Risk Level: 20–40 (If the right people are selected, the return can be very high).

For many growing companies, the realistic first step is Option B. A key point in its implementation is shifting the agenda from “items for approval” to “items for deliberation.” For example, make the process of formulating the next mid-term plan itself the subject of discussion across several board meetings. The purpose becomes not “approval of the president’s proposal,” but “comparing Proposal A, B, and C and clarifying selection criteria.”

Concretizing “Execution Supervision” by Learning from Stealth Ad Regulations and Medical Device Trends

Other recent news also offers rich suggestions for considering the board’s “supervision of strategy execution” function.

One is the movement toward new regulations on “stealth advertising” in influencer marketing. This is a prime example of an area the board should supervise: “Is our marketing strategy being executed in line with rapidly changing platform rules and societal ethics?” Rather than leaving it solely to legal or PR departments, it needs regular review from both risk (reputational, legal violation) and opportunity (new customer touchpoints) perspectives as part of business strategy.

Another is the trend of “quality compliance and innovation” in the medical device industry. The key here is not to view compliance (quality control) and innovation (new product development) as opposing concepts. Excellent governance understands that only within a strict quality management “framework” can safe and groundbreaking innovation become sustainable. The board has the role of positioning rules that the development department may see as “constraints” as the “foundation enabling innovation” and deciding resource allocation accordingly.

Three Questions to Ground “Supervision” in Practice

Board members (including the owner-manager themselves) should ask these questions every time they “supervise” strategy execution.

1. “How flexible is that strategy to anticipated changes in the customer, market, and regulatory environment?” (e.g., If SNS ad regulations change, can our marketing adapt within a week?)
2. “Is the definition of success and the metrics (KPIs) to measure it shared by all members? And do they capture the essence of the business?” (e.g., Should metrics include not just sales but also customer safety and ethical reputation?)
3. “Are the exit conditions (triggers) agreed upon in advance, in case this strategy does not progress as expected?” (e.g., If ROI does not reach a certain level within 12 months, we will pivot.)

These questions encourage a shift from an attitude of “listening” to department head reports to one of “thinking together” about management challenges.

Common Failures: Imitating Form and Neglecting Substance

A common failure for SMEs trying to strengthen governance is imitating only the “form” of large companies.

• Failure Example 1: Proliferating Committees: Compensation Committee, Nomination Committee, Audit Committee… Establishing them in name only, without substantive discussion or adequate materials, just increases burden. First, focus on improving the quality of the single forum that is the “board of directors.”
• Failure Example 2: Creating Minutes Solely as “Evidence”: Minutes are not just for recording decisions, but for recording the decision-making process and rationale behind “why that option was chosen.” They become a valuable organizational asset, allowing you to reference your own past thinking when facing similar crossroads in the future.
• Failure Example 3: Making External Directors “Figureheads”: Even if you bring in external expertise, if they receive insufficient information beforehand or the atmosphere discourages candid opinions, the ROI is zero. Give external directors a clear role to “point out risks and opportunities invisible internally,” and provide the information and time needed for that.

Your State After Reading: A Leader Who Can Design the Decision-Making “Forum”

Don’t let the news of the FSA’s Governance Code revision end as just a cautionary tale. Use this as an opportunity to inspect and redesign your company’s most important decision-making forum, the “board of directors,” from the following perspectives.

Before (Reading this article): You saw the board as a necessary evil mandated by law, or simply a place to convey the president’s ideas.

After (Reading this article): You understand the board is a “management engine” you can design yourself to broaden the owner-manager’s perspective, increase options, and enhance decision quality. You’re thinking of turning one approval item at the next meeting into a deliberation item comparing multiple options.

The essence of governance is not about binding with rules, but about thinking of “mechanisms” to achieve business objectives more reliably and intelligently. That first step begins in the “meeting room” right beside you.