Nissan’s Decision Marks a Turning Point in Governance
According to the Nikkei, Nissan Motor has decided to shorten the term of its outside directors from the current 10 years to 6 years. This move is reportedly aimed at increasing corporate governance transparency.
While this may seem like a change for large corporations, it offers important insights for SME governance design. How you set the term for outside directors isn’t just a matter of policy—it’s a fundamental issue that affects the quality of your company’s decision-making.
What Happens When Terms Are Too Long?
In many SMEs, outside directors are often old friends of the CEO or executives from business partners. In such cases, longer terms can lead to the following problems.
First, the distance between outside directors and management shrinks too much. What started as an objective perspective becomes “family” after years of association. As a result, it becomes harder to offer critical feedback to the CEO.
Second, the outside director’s own perspective becomes fixed. Constant exposure to the same company’s information over a long period can rigidify their thinking patterns. This makes it difficult to make flexible judgments in response to changing business environments.
Third, there’s a risk of missing the right time for a change. When terms are long, even if an outside director ages or faces health issues, opportunities for replacement are less frequent.
The Reality of “Figurehead” Outside Directors in SMEs
Among the 38 companies I’ve supported, about half of the SMEs with outside directors had no clear rules regarding their terms. Even if the articles of incorporation or board regulations stated “term is X years,” in most cases, reappointment happened automatically.
In one manufacturing client, a founding member had served as an outside director for over 20 years. The CEO kept reappointing them because they were “trustworthy,” but the board had become essentially a formality. All proposals were approved unanimously, with no real checks on management.
Three Benefits of Shorter Terms
Applying Nissan’s decision to SMEs, shorter terms can be expected to bring the following benefits.
Restoring the Check-and-Balance Function
When terms are clearly defined, outside directors are aware that their position is temporary. This awareness creates a psychological foundation for offering candid opinions to management without hesitation.
This is especially important in SMEs, where outside directors often have long-standing relationships with the CEO. A clear term limit becomes an unspoken rule that says, “You don’t need to hold back.”
Regular Infusion of Fresh Perspectives
Setting terms at 3 to 6 years ensures that new people regularly join the board. Bringing in talent from different industries or with different experiences introduces diversity into management decisions.
This is particularly effective in industries with rapidly changing business environments. In fast-moving fields like IT or the restaurant industry, refreshing talent every three years can help maintain competitiveness.
Optimizing Governance Costs
Compensation for outside directors is a significant cost for SMEs. Shorter terms make it easier to review compensation levels and smoothly transition to more suitable candidates.
Long-term contracts make it difficult to reduce compensation even when performance declines. Setting term limits allows for more flexible compensation design based on the company’s current situation.
Specific Actions SMEs Should Take
Here are actionable steps that SME owners can start implementing today.
Audit Your Current Term Rules
First, review your company’s articles of incorporation and board regulations. Clarify how long the term for outside directors is set and what the conditions for reappointment are.
If the term is 10 years or more, or if the wording is vague like “reappointment is not prohibited,” this is your first step toward revision. While changing the articles may require a shareholder meeting, understanding the current situation is crucial.
Set an Appropriate Term Guideline
Based on my experience, a term of 3 to 6 years is appropriate for SME outside directors. Less than 3 years may not allow enough time to understand the business and build relationships. On the other hand, exceeding 6 years increases the risk of the “insider” problem mentioned earlier.
While the optimal period varies by industry and company size, consider starting with a rule that sets a maximum of 6 years total, such as “3 years + one reappointment.”
Design the Transition Process
To maximize the benefits of shorter terms, you also need to design the transition process. Decide in advance on criteria for selecting new outside directors, methods for transferring information from existing members, and onboarding programs.
A particularly important element is a system for gathering feedback from outgoing outside directors. By candidly soliciting their insights on management challenges and areas for improvement at the time of departure, you can use this information to refine your next governance design.
Common Pitfalls and Countermeasures
Here are three common mistakes SMEs make when introducing shorter terms.
Ending Up with a Superficial Change
This is the “We just changed the term to 3 years” case. However, reappointment may still happen automatically, effectively extending the term. As a countermeasure, establish a rule that requires shareholder meeting approval for any reappointment.
Losing Excellent Talent
As a result of shorter terms, you might lose a great outside director when their term ends. A countermeasure is to offer a way for them to stay involved as an advisor after their term, or to clearly state the conditions for reappointment.
Depleting the Talent Pool
For SMEs, the absolute number of people who can serve as outside directors is limited. Shorter terms may require more frequent searches, risking a decline in quality. As a countermeasure, it’s important to proactively build a talent network by leveraging industry associations and business owner communities.
Conclusion: Terms Are a Design, Not a Deadline
Nissan’s decision to shorten outside director terms might seem like something only a large company can do. However, its essence is “institutional design to improve governance quality,” and it’s applicable to SMEs as well.
Shortening terms is not the goal itself. The real point is to maximize the function of outside directors and enhance management transparency and decision-making quality by clearly defining term limits.
I encourage business owners to review the terms of their own outside directors. Are they long-term simply because they are “trustworthy”? Governance only works when it is designed as a system, operated, and regularly reviewed.
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