What the Ranking of 10,821 Outside Directors Reveals
Diamond Online’s latest 2026 ranking of all 10,821 outside directors at listed companies has sparked discussion. This ranking visualizes the concurrent positions and attributes of outside directors, highlighting the reality of a “fever bubble” and the “yes-man” phenomenon.
The article points out the existence of “professional outside directors” who serve on the boards of numerous companies and the structural issue of selecting personnel similar to management. This is not just a problem for listed companies; it is a theme deeply relevant to the governance design of small and medium-sized enterprises (SMEs).
For SME owners, outside directors should function as a “device to improve management quality,” not as “decoration.” However, in reality, outside directors often become yes-men, leading to the formalization of governance.
This article analyzes why outside directors become yes-men and proposes concrete measures that SMEs can implement.
Three Structural Flaws That Create Yes-Men
The background to outside directors becoming yes-men is not simply a matter of poor selection but structural problems in organizational design. The following three points are particularly prominent in SMEs.
Information Asymmetry
Outside directors often cannot access detailed internal company information. The materials provided at board meetings are selected by management. This leaves them with insufficient material to “oppose” management’s assertions.
In SMEs, the information disclosure system itself is often underdeveloped, forcing outside directors into a position of “only believing what they are told.” This is not a problem of the directors’ ability but of information design.
Imbalance Between Compensation and Responsibility
Compensation for outside directors at SMEs tends to be lower than at large companies. It is not uncommon for it to be several tens of thousands of yen (approx. $300-$1,000 USD) per month.
At this compensation level, outside directors have little incentive to take the risk of directly confronting management. Instead, “not making waves” becomes the rational course of action.
Closed Selection Process
In SMEs, outside directors are often chosen through introductions from the owner’s acquaintances or business partners. In such cases, a bias towards selecting people who will say “yes” operates from the outset.
Diamond’s ranking also points out biases in the attributes of outside directors. This tendency is even stronger in SMEs, resulting in a gathering of “people who don’t speak their minds.”
The Pitfalls of the “Fever Bubble” for SMEs
The term “fever bubble” used in the ranking article also applies to SMEs.
During prosperous times, outside directors are less likely to question management’s decisions. An atmosphere of “things will go well if we follow the president’s lead” dominates, and critical opinions are suppressed.
However, this state is precisely the breeding ground for governance failure. It is during good times that verification from different perspectives is most needed. The greatest value of an outside director lies in “not sharing the same views as the president.”
A common mistake among SME owners is selecting outside directors who “agree with them.” This misunderstands the essence of governance. Outside directors should be “verifiers of management,” not “accomplices in management.”
Five Designs to Turn Outside Directors into a “Management Weapon”
So, how can SMEs make their outside directors function effectively? Below are specific action proposals.
1. Contractually Guarantee Information Access Rights
Stipulate in the contract the right for outside directors to freely access internal company information. Specifically, include the following clauses:
・Advance delivery of board meeting materials (at least one week before the meeting)
・Direct access rights to accounting data
・Rights to interview key employees
This prevents outside directors from becoming yes-men due to “lack of information.”
2. Redesign Compensation as “Payment for Opinions”
Incorporate incentives for management improvement proposals and risk identification in addition to fixed compensation. For example, consider the following design:
・Base compensation: 50,000 yen (approx. $350 USD) per month
・Performance-linked compensation: A fixed percentage of sales or profit
・Special compensation: Paid according to the number of times the director challenges management’s decisions
While a “dissent bonus” may seem unconventional, it is a design that recognizes the value of “opposing.”
3. Outsource the Selection Process to a Third Party
Entrust the selection of outside directors to a specialized introduction agency or law firm, rather than the owner or business partners. This helps discover personnel who are not homogeneous with the owner.
Specifically, select candidates based on criteria such as:
・Experience in a different industry from the owner
・A track record of serving as an outside director for a listed company
・Professional qualifications in accounting or law
4. Use Board Meeting Minutes as a “Record of Opinions”
Record the reasons for both approval and opposition in detail in the board meeting minutes. If an outside director expresses a dissenting opinion, accurately recording the reason allows for later verification.
Furthermore, making the minutes accessible to all employees visualizes the significance of the outside director’s role within the company. This increases the “weight” of the outside director’s statements.
5. Introduce Regular “Outside Director Evaluations”
Implement a system to evaluate the performance of outside directors themselves once a year. Evaluation items should include:
・Number of questions posed to management
・Specificity of risk identification
・Proactiveness in information gathering
Using these evaluation results as a basis for compensation and reappointment can shift the behavior of outside directors from “yes-men” to “critical verifiers.”
The Essence of Governance is Improving the “Quality” of Outside Directors
What Diamond’s ranking revealed is a problem of “quality,” not “quantity,” of outside directors. SMEs cannot ignore this lesson.
To make outside directors function as “verifiers of management” rather than “accomplices in management,” it is necessary to thoroughly design the three points of information, compensation, and the selection process.
I ask you, the business owner: Are the outside directors at your company truly in a position to “speak their minds”? Or have they become mere “decoration”?
The yes-man phenomenon among outside directors is a symbol of governance failure. Addressing this issue is key to the sustainable growth of SMEs.
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