The full text of Dialogue/Speech/Discussion in the first "Nikkei Global Management Forum"

[KANDA ] Thank you. Let us begin. I would like to begin by briefly introducing our panel members, but of course all of the panelists are very well known, and their biographies are printed on page 9. But may I say that Sir Ronald is a very well-known face to us, but more recently he has been very active as the chairman of the so-called Hampel Committee, which studies corporate governance issues, which is a kind of a final report, compendium of all the previous reports, and came up with the combined code. And I am a great fan of the Hampel Report. In the last year or two, whenever I had the opportunity to make speeches, I have made sure to sell my audience this report. Our next panelist is Mr. Thomas McCarty. He has been stationed in Asia as a representative. He's been in Japan as a representative for his firm. But I suppose today we'll be going beyond the Asian perspective, and we are going to invite Mr. McCarty to inject the American perspective into our discussion. And Mr. Ueshima ... there is no need for me to introduce him, he is one of the premier corporate managers of Japan. And we can learn greatly from his experience in corporate governance. So much for myself, but let me say a few words about how we intend to proceed. First, I'm going to ask Sir Ronald and Mr. McCarty and Mr. Ueshima to share with us their views respectively. After the first round of remarks, we will start discussions, and toward the end we will be spending some time for questions and answers with our audience on the floor. Now, the top batter is Sir Ronald, please.

[HAMPEL] Good afternoon, ladies and gentlemen. Let me state at the outset that corporate governance to me does not have a simple formula for success, and it is important, I think, that you should recognize that I approach this subject as a practitioner. I've been a businessman all my life; I'm not an academic. And like everyone else, I'm the prisoner of my own experience. I've served in my time on five U.K. boards, on boards in Germany, Italy, and France; on two boards in the United States; on stock exchange committees in both the U.K. and the United States. And I now sit on a Japanese advisory board. Above all, this is not a subject which to me requires revolution. It requires evolution and it requires evolution within the traditions and the precedents in a national environment.

I should perhaps give you a little background to the committee which I chaired in the U.K., because it's important that you should recognize the basis on which our work was done. In the early '90s, there were a number of corporate collapses including fraud. And a committee to examine the financial aspects of corporate reporting under Sir Adrian Cadbury was formed that was known as the Cadbury Committee. Then in the mid-90s, there was considerable concern in the U.K. in industries which had been privatized about the level of remuneration. And that became a political and media issue, and as a result the Greenbury Committee was formed. It became clear subsequently to the Bank of England, to the government, to the stock exchange, and to industry generally that the subject had been examined from particular aspects and not as a generality. And I was asked to chair a committee to look at the total aspects of governance from a U.K. background.

The committee which I chaired was made up of six businessmen, three from the shareholding community and three professionals -- the senior partner of a firm of prominent lawyers in the U.K.; the senior partner of a firm of accountants and of finance director. The essence of our work was practical; it was not academic. And the essence of it consisted of three elements. First, that there must be business prosperity, for the benefit of shareholders and for all stakeholders. And because without business prosperity there is no requirement for governance. The governance elements were made up of two other aspects. Of accountability, the acceptance that all public companies -- and we were talking in our study about listed companies -- that all public companies need to be fully accountable, not only to their shareholders, but to the wider community. And that accountability can only be exercised by full disclosure.

It would be marvelous, would it not, if there were a single formula for governance, for the structure of a board, which could command success. But life isn't like that. And the essence of the U.K. view of governance is that this needs to be interpreted flexibly. Yes. There are certain principles and guidelines -- and I will discuss those in a moment -- but at the back of all this lies the requirement that shareholders and others should exercise judgment on the governance in each business according to the disclosure that has been made by the corporation.

The first purpose of governance, therefore, is to ensure a prosperous company. And the view which has developed in the U.K. is that a properly balanced board, with an appropriate number of independent directors, is the best way of providing that prosperity. The outside directors have a clear responsibility to test the strategy and the performance of the insiders. The second prime requirement is accountability, and in that the outside directors have a clear responsibility to ensure that the board is fully accountable. And thirdly, in disclosure, again, the outside directors have a clear responsibility to demonstrate that full accountability and to draw the attention of the board to any deficiencies.

Our view -- and it's essential again to remind you that I do not believe that you can impose a single global structure; you need to have regard to the history and traditions of each environment. But our view has been clearly that the structure of any board requires independent directors to provide balance, and that those independent directors need to be strongly enough led, so that the internal management can be brought in to check where that is appropriate.

In the U.K. there has been much discussion about the separation of the roles of chairman and chief executive. The view that we took was that it is appropriate, in the majority of cases, for those roles to be split; and in simplistic terms, for the chairman to run the board and the chief executive to run the company, to run the business. But by no means is that the only way to succeed, and there are plenty of examples of extremely successful companies which have been run by combined chairman and chief executive, a practice which is much more prevalent, as you're all aware in the United States. But our view is clear that if you have such a combination, there needs to be a powerful group of independent directors, strongly enough led so that they can challenge the chief executive where it might be appropriate.

The definition of independence was one of the issues upon which we have been challenged. To me independence is a state of mind. It is not based on background family history or length of tenure. Having said that, it is clearly the requirement of any board to demonstrate that it has an adequate number of independent directors and to set out what their history is so that the outside world may judge the degree of that independence.

Let me move on to the classic debate about the division, or otherwise, between shareholder and stakeholder. Clearly, the shareholders are the owners of the company, but no company can operate successfully without proper regard to all its stakeholders, whether they be employers, employees, customers, suppliers -- and in the case of the chemical industry in which I operated for so many years -- the environment, the local communities within which you operate. It was our view -- and in an environment where that might well have been challenged, surprisingly it has not -- it was our view that it is each board's responsibility to set clear objectives for the management to serve all stakeholders. And if the management serve all stakeholders appropriately, then prosperity of the company will benefit and the shareholders will benefit. We see no requirement in our environment for stakeholder representation on boards.

Two issues which have been of significance in the U.K., which are worthy of mention, the first is executive remuneration. Much has been made of this in our media, and it has become a political issue. The view of our committee was to endorse strongly what Greenbury had said, which is that there should be full disclosure of remuneration so that there may then be judgment by shareholders and others as to whether that remuneration is appropriate. There is no place in a free market economy for the control of remuneration. But that remuneration should be seen to be appropriate and that rewards should be high when there is good corporate performance is entirely acceptable. And that has broadly been perceived as adequate. The media concern in the U.K., and indeed shareholder concern, has been where poor performers have received high reward and frequently have taken significant sums when they have been removed from their posts.

The other issue of considerable significance is the balance between the small shareholder and the big institution. The classic formula in our country is to use the AGM as the vehicle for the transmitting of information to the small shareholder. I believe we actually failed in this regard, because it is our system to vote on major resolutions at our annual general meetings and to have a vote by show of hands. The vote by show of hands achieves nothing, because the actual power of the voting lies with the institutional shareholder who actually delivers judgment before the meeting on whether or not the resolutions shall or shall not be carried. We are seeking to recognize this in the U.K. by publishing at AGMs now the actual voting that has been made on resolutions. And it is my view that in the foreseeable future, we shall move away from voting at AGMs and merely use the annual meeting -- and I use the word merely perhaps incorrectly -- use the annual meetings as a vehicle to inform the small shareholder of the progress of the company and allow the small shareholder to cross-examine management on performance. There is unquestionably, in our environment, a disequilibrium between the information which is provided to the major shareholders and to the minor shareholders.

I'm happy to say that the U.K. now has a balanced view of governance. The effective end result of the work we did was to produce a combined code, a combination of my committee's report of Cadbury and Greenberry, into a set of principles which are attached to the listing rules of the London Stock Exchange. There is a minimum of requirement; the requirements are basically associated with accounting and with disclosure. But there is a clear requirement for disclosure, and that now enables the world at large, whether it be the shareholder, the general public, or the media, to make judgments on whether the performance of the company, whether it's governance, are appropriate, and to take action, if it does not think so. To me, I hope -- and I think within the U.K. environment it is likely to be so -- that we do not require further legislation. There has been some debate as to whether there should be a distinction drawn in law between the obligations of the inside director -- the executive director -- or the outside director. Our committee took the view that once you're a director of a company, it was entirely appropriate that you should have an equal liability under the law to perform and to have proper regard to the affairs of the company, and that the courts -- and they have demonstrated this in our environment -- the courts are quite capable of interpreting the different obligations of inside directors and outside directors in respect of the information they can be expected to have. That has proved successful to date, and I would hope, therefore, that there will be no requirement for further legislation in this field.

My own committee sat for two years. We had full discussion; we allowed anybody from the corporate business sector, indeed from any interested party to contribute to our deliberations. And the committee now no longer exists. Clearly is it within the gift of future governments, or the Bank of England who established in the first place, to set up such a committee again in the future. But for the moment what we are doing in the U.K. is letting this practice that has developed manifest itself and prove itself, and so far so good. Thank you very much.

[KANDA ] Thank you very much. Now I would like to ask Mr. McCarty.

[McCARTY ] Good afternoon, ladies and gentlemen. Today's topic is Corporate Governance in Global Management. And my overall message is that I think the major impact of globalization on corporate governance will be an evolution toward a more common global model for corporate boards. I'd like to develop that theme by describing and contrasting some of the features of corporate boards in both the United States and in Japan.

But let me first begin with a rather simple assumption. And that assumption is that good corporate governance is good for a company. It raises investor confidence; it reduces the cost of capital; and it can lead to better management performance. And the corollary is that the absence of good governance can have serious consequences. And I think we have seen that in the Asian crisis. Certainly not the only reason, but one of the reasons, was a lack of good governance, so-called KKN -- corruption, cronyism, and nepotism -- were rampant in some of the Asian economies. These things do not occur in well-governed companies.

Let me take a stab at defining corporate governance. It's a rather broad topic and there probably is as many definitions as there are commentators. But here is mine. I tend to think of corporate governance as referring to the relationship between the participants in the corporation -- that's the management, the board, the shareholders -- and the external forces that impact a corporation.

Now I think, when we talk about governance, most of the interest has to do with the role of the corporate board. And let me tell you what I think that role is. Four points. First, I think the board is responsible for business strategy development -- not in creating a strategy; that's management's responsibility, but in ensuring that the company has a viable business strategy. Second, I think it's the responsibility of the board to see that the company has high-caliber CEO and also that there is an executive team and a management development process that will generate the future CEO. Third, I think the board must be sure that the company has adequate information control and audit systems that tell its senior management and the board whether the company is meeting its business objectives. And also ensuring that the company is in compliance with the legal and ethical standards imposed by law and imposed by the company's own statement of vision. And finally, I think the board has responsibility for preventing and managing crisis; that is, risk management.

Now when one looks at U.S. and Japanese boards, I think you'd find that the legal charter and the mission of corporate boards in the two countries is pretty much the same. I also think that if you ask a member of the board of directors of either an American or Japanese company to describe their roles and responsibilities, they would probably suggest, both of them, that they represent the interest of all of the stakeholders in the corporation; that is, the employees, the management, shareholders, customers, suppliers, and indeed the community at large.

However, I think the actions of the boards are quite different with respect to those stakeholders, and you would find that in fact the U.S. boards are decidedly skewed toward the interest of the shareholders, whilst that of Japanese boards is really focused more on the other stakeholders, particularly the company's employees.

Now this emphasis in the U.S. on shareholders translates into a governance system that is very focused on share price. And it has executive compensation that is tied to share price and very much focused on the need for meeting quarterly earnings targets. Now I think this goes a long way in explaining the speed with which American companies will take on restructuring and also the relatively high turnover among CEOs in American companies.

If you were to think about the decade of the '90s and the actions that American boards have taken to change CEOs, the list is quite long. Digital, General Motors, Kmart, Sears, IBM, Delta, Up-John, Bausch & Lomb, Wayst Management, and most recently Compaq. In each case the CEO was ousted at the direction of the board.

I think another area where the boards differ between the two countries has to do with the composition of the board. Japanese boards are typically much larger than their U.S. counterparts. In the U.S., the board is typically in the range of 10 to 15 or 16 members, whereas, as you well know, most Japanese boards are closer to 30 to 40. Although I think there is a bit of a trend emerging in Japan for smaller boards, and in fact more than 200 listed companies have announced their intention to reduce the size of the board. And there are some notable examples. Sony has gone from some 30 members down to 11, and I think other well-known companies. Nissho Iwai, OX, Daiei, Nippon Fire & Marine, and others have announced their intention to downsize the board.

Another significant difference has to do with the composition of the board. As you're aware, the Japanese boards largely consist of internal management members, whereas the U.S. boards typically have a large majority of non-executive directors. Although I think there is, again, some change in Japan, and we're beginning to see some companies initiating outside directors.

Another difference that drives behavior has to do with the nature of share ownership. In the United States, the shares of corporations are largely owned by individuals and by pension and mutual funds. Almost half the shares are owned by individuals; maybe another 25 percent or so by pension funds; 10 percent by mutual funds. Whereas in Japan, the individual investor participation is significantly lower, and of course the financial institutions and the cross-business holdings are significantly higher.

I think where we can really begin to see the role of globalization, however, is in the amount of foreign ownership in Japanese corporations. I was actually quite surprised in doing some research for this meeting, to learn that about 10 percent of the shares in the Japanese listed companies are owned by foreigners. And I was further surprised to learn that that is double the percentage of firms in the United States. In other words, only 5 percent of the listed shares in the United States are owned by foreigners. And that foreign ownership in Japan has changed quite dramatically. If you go back to as recently as 1990, it was 3 or 4 percent, and today it's something in the range of 10 percent or more.

I think another impact of globalization has to do with merger and acquisition activity. As you know, in Japan this is a relatively recent phenomena but really has gone to record levels. In 1998, there were more than 800 M&A deals, which was more than double the number just five years earlier. Now this is still relatively small compared to the U.S. -- you heard Mr. Jack Welch this morning say that General Electric, they did over 100 last year, just one company. So it's quite different. But when viewed in the historical context, this merger activity is, I think, quite a change in Japan. And if you look at the nature of some of the deals that have been done, GE capital acquisition of coming together with Japan Leasing and Toho Life, Renault buying a share, Nissan, British Telecom, and AT&T, in Japan Telecom, Cable and Wireless, IDC, all examples of global companies coming together.

I think there is another factor that is, to a certain degree, stimulated by globalization, and that is changing regulations in Japan. The simplification of the procedures for law suits -- that's an unfortunate trend that maybe you are following from the U.S.; I hope you can resist it here. But it has been simplified, and there has been a corresponding increase in law suits. And also the right of shareholders to have information regarding a company has been liberalized.

There are also a number of accounting reforms that I think again are driven by this global trend. The requirement for consolidated accounts, which I think becomes effective next year; the valuation of assets at market values; reporting on pension fund liabilities. I think these kinds of things are examples of global trends being picked up in Japan. I think there are also changes in auditing standards. As you know, historically Japan has the unique internal audit function, and that is quite unique to Japan. The law has now been changed to extend the term of auditors; it is suggesting that at least one of them be unaffiliated, and it is encouraging and in requiring more extensive outside audits, and I think foreign ownership will continue to drive this trend.

Now I think there is one other, what I think quite interesting, phenomenon that's going on in the U.S. that's having a major impact. And that is the role of institutional investors and their so-called shareholder activism. And let me give you an example of that.

You may have heard of a pension fund called CalPERS. CalPERS is the California Public Employee Retirement System. It's the largest pension system in the United States; it has over a million members, $150 billion in assets. This group is very proactive in checking up on the companies that are in their portfolio. They come from a point of view that they are so big that it is difficult for them to trade in the marketplace. And therefore, they are investing in companies for the long term, and they expect those companies to perform. So they have an annual exercise where they identify 10 poorly performing businesses within the portfolio, and they exert tremendous pressure on the boards of those companies to improve shareholder value. And they've become quite public in doing so. And this is the kind of phenomenon one sees as institutional investors become more active and something that we may be seeing in Japan.

Finally, I'd like to comment on an event that -- it's really not often discussed in the context of corporate government. And that is electronic commerce. Electronic commerce is having a profound effect on the U.S. economy. Many commentators believe that it is responsible for the significant increase in U.S. productivity, even giving it credit for the high employment levels and the booming share market. Every American company is affected by this phenomenon. And I think the impact in Japan will be just as dramatic. Now this is not just consumers playing around on the Internet; it's not just Silicon Valley. We're seeing new business models emerge; we're seeing new competitors intent on siphoning off the high-margin activities in the value chain; we're seeing the advantage of first-movers, speed to market more important than ever; we see young people playing increasingly important roles; and we see traditional compensation models being replaced by more risk-reward based techniques again that are often tied to share price. And interestingly enough, we're beginning to hear the term keiretsu being used to describe the relationships being forged by technology companies as they formalize alliances. So if you are on the West Coast, you hear about the Microsoft keiretsu , the Sun keiretsu , and even the Softbank keiretsu.

Now my point in raising e-commerce is that this is a phenomenon that boards need to understand. The market is valuing e-commerce, the market is valuing speed of action. And the board needs to ensure that the management of the company has a viable e-commerce strategy. And this requires that both the management and the board members have an understanding of what is happening in the new economy. Now this is a challenge not only for Japanese boards; it's also a challenge in the U.S. And boards also need to really think about the types of compensation systems that they are using to attract and retain the type of talent that's going to be necessary to be effective in this new economy.

And so to summarize, I think the major impact of globalization on corporate governance will be an evolution toward a more common model for corporate boards. And I think the impact in Japan results in smaller boards, with more outside directors, international accounting and auditing standards that will provide greater transparency, and more emphasis on the return to the shareholder. Thank you very much.

[KANDA ] Thank you very much. Now I'd like to call upon Mr. Ueshima.

[UESHIMA ] Professor Kanda, thank you very much for you kind introduction. As was introduced, my name is Ueshima, CEO of Mitsui & Company.

This afternoon we have Sir Ronald from Europe and Mr. McCarty from the United States, both very well knowledgeable and very well versed in this issue of corporate governance. And listening to the presentation of the two gentlemen, I have been very much impressed, and there are various aspects I think I could incorporate into our management from the lessons I was able to draw from the two presentations.

Well, my standpoint, my position is different from my two co-panelists in the sense that I am heading the company, Mitsui & Company of Japan. Incumbent president, as a CEO according to the words used by Mr. McCarty, the company is involved in global work, and so I should like to express my personal view based on my experiences to this common theme of corporate governance in global management.

First, when we think of the global management in the globalized era, what are the basic perceptions the Japanese CEOs have, including myself, and what sort of efforts we are making in the overall context. So corporate governance is based on this basic perception we have of the management in the global era.

The first, in this current era of globalization, what is the globalism? In essence it means that the world market is becoming one. And in such a marketplace, the most efficient and the most competitive can survive and prosper. In other words, in this free market, those efficient and those not efficient are very ruthlessly selected and screened. And as was mentioned earlier, this intense competition prompts reorganization, and further, the revolutionary progress of information technology would give further impetus to the speed of globalization and the enlargement of the scale of globalization and further accelerate this move of making the world market into one. This is the kind of reality we are placed in.

As you know very well, for instance, in 1997 the East Asian currency crisis took the form of contagion to various other parts of the world, and also with the market entry of emerging country markets, we see the advent of the strong wave of megacompetition. So in this global scene with such trends, our mission is to rise to the challenge of achieving business prosperity and to achieve it.

And the second point in terms of our basic perception is the common task of the executives or the management of the joint-stock company common to the world, what is it? It is the maximization of the corporate value. It goes without saying, but in other words, this means how to maximize corporate earnings. That is a very important challenge for us. And at the same time, how to distribute the earnings in a fair manner and to deliver the task and the responsibility in the face of shareholders. And at the same time, what's important is, companies naturally pursue their own strategy of selection and concentration. And by repeating this process, corporations develop themselves. But today, corporations themselves are exposed to the very severe scrutiny by the market and the customers. So we should be fully aware of that. And we should apply this awareness to our management. I think it is a very important aspect of the management. That is, companies should reform themselves so that market will select them and highly value them. This kind of self-reform would lead to the prosperity and strength of the companies into the future. So this is the interactive relationship between the corporations and the market. And due attention should be paid to this kind of interactive relationship.

And the third point of our basic perception is that, for instance, in case of our company we are engaged in wide-ranging business activities throughout the world. And that's the nature of my company, and to different degrees many Japanese companies are placed in the same situation. So in this overall trend of globalization we should quickly build a firm foundation through which we play the game with the same set of rules. That's important for us in Japan, for Europe, and the United States, and for Asian countries, the same set of rules of the game. So we should actively introduce the systems and institutions necessary for that. We welcome that. And in fact we have been pursuing that direction ourselves. And I can say that we are fully prepared for that to take a prompt response. And in terms of internal setup within a company, we can adapt ourselves to very bold steps we will be taking along this line.

So these three points in a very summarized, simplified manner, but these I think would serve as the starting point of our thinking in corporate governance and in devising our response based on the requirement of good corporate governance.

So let me now go into this matter of corporate governance. Sir Ronald and Mr. McCarty both mentioned that improvement and enhancement of corporate governance are the most important managerial tasks and challenges. And it is not something that happens all of a sudden all in one day; it is the constant learning process based on shared philosophy. And from the standpoint of best practices for one's company, screening should take place. And what should be adopted should be adopted speedily. And some matters which may not be conducive in a certain scene would have to be scrutinized, even though a certain matter may be well adopted in the U.S. or in other countries, there should be a process of selection and adoption to suit the situation of each company. So in our company, too, we put all the matters on the discussion table, the selection process, and what's considered necessary and good would be introduced expeditiously. And when one aspect is considered too premature, we will not try to introduce that in too hasty a manner.

And one point where I agree with the other two speakers is that corporate governance ultimately should ensure the transparency of management and to ensure their accountability and fairness. And to present those to the shareholders and market in the form of disclosure. The expression and the terms used may be different, but in terms of thinking I agree with my two previous speakers, because transparency, accountability, and fairness are the very basis of corporate governance. But in terms of practical thinking, in order to ensure transparency and accountability to the outside to the shareholders and to the market, naturally we would have to set up a good basis and appearance, but not merely a form or how it appears, but what's important is the internal process and setup. Those directly engaged in management as well as the individual employees, each one should be thoroughly aware of the code of accountable behavior and put that into implementation. So the company, as an organization as a whole, can ensure transparency based on the corporate infrastructure for that purpose.

Those listening to me, especially Sir Ronald and Mr. McCarty, may think that Mitsui & Company, my company, is struggling at such a starting point. That's a reality. I am talking about corporate governance here, but I'd like to emphasize that we have to have a corporate infrastructure that ensures transparency and accountability to the outside. I mentioned that the philosophy should be shared, but there would have to be a very basis of infrastructure there. Otherwise, we cannot exercise our philosophy in a particular pragmatic manner.

In our company, too, we have been working on this kind of reform, or the mechanism for the reform, for the past several years. Well, frankly speaking, only for the past several years. We have been directing much attention to this. We have had the clear division of power, shall I say. Each source of power mutually checking each other throughout our corporate history before the war and after the war. But it's only quite recent that we have a fully established mechanism and setup of good mutual checking. But one good result we were able to attain through this process was that through our efforts of making our company transparent in terms of management and to lay infrastructure to that end, to ensure the transparency and accountability throughout the companies including each and every one of our employees. Through this process, through this internal practice, we could see the generation of sense of tension and alertness throughout the corporate organization. We are still in the process, but that gives due discipline to the management including myself, CEO, and also to exert a favorable impact to ensure good-quality management. So it has been this kind of interactive effects that we could achieve. And we would not relax our efforts, nor sit back on our laurels at all. It is a continuous process.

If I may repeat myself, the philosophy of corporate governance is something I share and agree with others, and I think most of you in the audience would agree with the shared philosophy of corporate governance generated from excellent management of European or American corporations through history and experiences. That's something we could draw many lessons from. Also in the globalized business community, we should try to reform ourselves so that we will be playing the game based on the same set of rules. That is taken for granted, but in terms of specific methodology and the specific techniques or ways and means to be adopted, I think there could be differences from one country to the other or from one corporation to the other in terms of their characteristics and the unique features.

But, as a matter of practical reality, there are the requirements that a company must comply in terms of legal compliance. And there are the aspects which could be left to the discretion of each company and company management. We have to separate and make a clear distinction between those two aspects. And based on that, we should try to adopt what's best for each company.

The universally common principle, according to Sir Ronald's word, that is the principle. Those are the musts. In other words, ensuring transparency based on universally common rules, such as international accounting standards, including my own company, companies should try to adopt that as a matter of must and try to cope with that in a speedy manner. We are doing that. And in the global marketplace it is important because everyone should play the game fairly based on the same set of rules. That's something we welcome. In fact, the accounting system in Japan will be changed. This year, fiscal '99, and next year, fiscal 2000, various aspects of international accounting standards will be introduced, such as consolidated settlement and the mark-to-the-market accounting. Those are musts. But there are other areas of corporate governance which may reflect the discretion of each company, because the business environment, culture, history and differences in commercial and business practices, and the difference in the legal setup surrounding each company or each country, such differences should be duly reflected in arriving at the desirable method of corporate governance. So for everything throughout the world to be uniform without any differences may be rather unrealistic.

Having said that, there may be some differences in the environment. In the Japanese environment, introduction of a certain aspect may not be conducive to the best practices, or may not contribute to the exercise of the best practices. But in view of our current systems, practices and the differentiation, such differences may not last forever. And we should not be complacent that what we see and what we do now would be the best and would last forever. We should always be aware that there could be changes that could be made and room for further improvement. And I, for one, do not think that what we do in my own company is the very best, and it should change in due course. We have to have a good yardstick to determine what could be best introduced now and what should be postponed. And what's needed for us could be identified through dialogue with the market and laying a solid foundation for future steps and to ensure the continuous reform into the future.

Before concluding, I have often used the term "we", but what I meant was the representation of position and situation of many of the CEOs in Japan. But more specifically, what about my own company, Mitsui & Company, what are we doing now. Because it would shed light on some of the efforts of implementation of what I've been saying.

In the case of my company, since its foundation we have had through-going independent PL management of each business unit, or business division. And we have a COO system of each business unit. Based on our internal bylaws and code the chief operating officers have wide-ranging rights and authority through delegation of power. And so we can ensure speedy management and accountability. We have introduced various changes to meet the needs of the times, but we have held onto this very basis of management foundation throughout our history.

And through the present revision of the commercial code in Japan, the corporate reorganization through stock-for-stock exchange is now possible. In the coming couple of years we will be seeing the introduction of a consolidated taxation system and some other related changes. We have to make sure of what sort of actual effect we can harvest by introducing the changes, but in our case we've had the very independent business unit system based on their own PNL. If we can make sure that it will work in our management, we may adopt a pure holding company stance and each business unit be managed by a fully authorized COO. This setup is very close to the holding company system already. So the change of the corporate setup and management, in terms of form and the methodology may lead to the introduction of further effective governance. And there is a high likelihood and possibility that we can introduce a different format of the pure holding company system. I'm not announcing as CEO that in a few years' time we will be adopting the pure holding company system, but when it comes, as I mentioned, based on this yardstick of best practice, we will be looking at the most effective corporate governance method.

Earlier I mentioned the fair distribution of earnings, and I'd like to say a few words about this before concluding my remarks. Of course the management putting the shareholders in the center should be the very basis of corporate management, and there's no dispute about it. Globality, transparency, and fairness are among such keywords as to how fair distribution of earnings should be carried out. I think there could be a different interpretation, or different philosophy. Among American companies or European companies as Sir Ronald mentioned, or among Japanese companies, I, for one, think that companies are supported by the shareholders to start with, and customers, partners, and employees and community. Therefore, to all these stakeholders of the companies the management should distribute the added-value in a very well-balanced manner and in a stable and appropriate manner in the long run. So, the well-balanced distribution of an appropriate added-value to the stakeholders in the long-run and in a stable manner is the basis of the corporate governance. And to deepen the relationship of trust with the stakeholders, this would lead to the sustainable growth of a company.

In April this year, despite the business difficulties we have in the Japanese business environment, we formulated, after two years of study, a long-term vision leading to 2010, and we announced this long-term vision to the inside and the outside of the company. This is a long-term vision to show the direction we will be pursuing in the 21st century. We are pooling all our wisdom to identify our way. I mentioned the shareholders, customers, and the greatest asset of our company -- the human resources, employees, and the community. We should try to ensure a return to all the stakeholders in a very well-balanced manner in order to fulfill our responsibility. This is the important origin of our efforts and the foundation of our corporate efforts.

The future deployment of corporate governance, or the development of corporate governance, shall I say, would meet the market scrutiny. And what survives the market scrutiny would be widely recognized as a global standard around the world. The minimum necessary standard will become the basic principle to be applied in actual practice and meet the needs of the market. In fact the speed of such change would be much quicker than we expect, and we should not lag behind the speed required by the market in adopting the corporate governance practices. Thank you.

[KANDA ] Thank you very much. With this we have completed the first round. Sir Ronald has talked about the committee and the background, as well as the thinking in U.K. He has introduced quite a number of very, very important points.

Mr. McCarty talked about the American model and he cited the characteristics. Furthermore, he focused on the differences from those of Japan. He finished off by talking about the impact of globalization, inclusive of the proportion of shares held by non-Japanese. He further talked about the role of the institutional investors as well as the issue of shareholders' activism. In the end, he talked about corporate governance in the days of e-commerce, which is a totally new perspective that has been introduced.

Last but not the least, Mr. Ueshima talked about management in the days of globalization. He talked about important principles and philosophy and said that we need to establish the same sets of rules in competing with each other. And from the perspective of corporate governance, what he said is that he is in total agreement with Sir Ronald and Mr. McCarty. However, the issue is: How do we implement this? Members of the company have to be accountable and members of the organization have to execute their duties in a transparent manner. Furthermore, he talked about methodology, saying that it would differ depending upon the country and the company. And last but not the least, he talked about how this has been implemented at his company, Mitsui & Company.

A number of very important issues have been raised by the three speakers. I would summarize them so that we may commence with the panel discussions. However, since we have Sir Ronald and Mr. McCarty with us and most of the people in the audience are Japanese -- or rather than to say Japanese, at least those people who are living in Japan -- as you look at the corporate governance in Japan, do you have any message as how it should be or how it would be, and if you have any comments, I'd like to invite Sir Ronald. He is a member of the management advisory committee, thus Sir Ronald is versed with the corporate governance in Japan. Maybe some points have come to your attention, Sir Ronald, and you could share them with us, please.

[HAMPEL] I think perhaps the first thing to say is that we are in danger of treating governance as though it is a new science. Governance is management and it has existed forever. It is simply that we have sought in today's world to embrace the public responsibilities of corporations in a different environment. My observations are inevitably somewhat distant, but I would say that in the U.S. and in the U.K. we have gone further with public accountability than has yet become the case in Japan. We have used the independent directors to take not only a responsibility for ensuring there is appropriate strategy for the corporations and long-term prosperity, but to ensure that there are proper accountabilities, essentially through audit committees and through remuneration committees. Thereby, portraying to the outside world, whether it be the shareholder, the stakeholders, or the public at large, that there is a degree of independence concentrating on the detail of individual corporations. That, I think, has exercised considerable good influence on our corporations. I believe it is something which is evolving in Japan; I believe it should evolve. I do not think it is a case for revolution, but I would commend that process to your companies. And indeed my own experience recently in joining the Teijin advisory board suggests to me that that company, as has been explained by my colleague at Mitsui, are moving in that direction.

[KANDA ] Thank you very much. What about you, Mr. McCarty? You've talked about the American model and you've contrasted it with Japanese characteristics. For one, you talked about the number of members on the board. And many, many companies, like 200 in total, are trying to reduce the number of board members. In terms of corporate governance, do you have an image of the direction that we should be proceeding here in Japan? Is there anything you could elaborate on further? We would appreciate it, sir.

[McCARTY ] First, I would echo what Sir Ronald said about the U.K., U.S. relative to Japan. I would not say what Japan should do, because I believe that is up to the investors; it is up to the market to demand performance from companies and let them speak through the marketplace. But the theme of my remark really is what I think will happen, because I believe events are being driven by the global economy, and that I think Japan will change along the lines that we have been discussing in terms of more transparency, more outside directors, and more demarcation between the board function and the management function. I think these things will occur because of the influence of the global markets.

[KANDA ] Thank you very much. From the two speakers, this is especially something that Sir Ronald has emphasized from the very start, that the board of directors is very important in corporate governance. Especially, as member of the boards, it is important to assure their independence so that they are serving as independent board members -- or should I say 'outside' board members. They have a function and a role to play, which are extremely important. And you talked about the Anglo-American model, saying that there is an audit committee within the board. And in the U.K. there is a renumeration committee and in the U.S. there is a compensation committee. And you said these functions are extremely important.

From the perspective of Japanese companies, these seem to be farfetched. In looking at many of the large Japanese companies, there are companies who are trying to reduce the number of board members, as was cited this morning, and there is a move to introduce the system of executive officers, so that execution is separated from management. But when we talk about the outside board members or the audit committee of compensation or remuneration committees, these still seem to be a farfetched concept for Japan as of yet. However, we might have some systems that could substitute for these.

Very simply, I'd like to ask a question to Sir Ronald and Mr. McCarty. Maybe this is a question often raised by the Japanese and you could be quite sick of them. But when we talk about outside directors, what are they to do? That's the question that I'm sure is raised quite often by the Japanese, because outside directors naturally are busy people, and furthermore, these are the people who may not be fully versed about the details of that company, and at the same time they don't need to. Thus, if you say that the roles of the outside directors are important, in a sense we understand this. But from the perspective of Japanese companies, what is the role that they play? This is a discussion that is repeated a lot in Japan.

Among the companies that have introduced outside directors, they invite those outside directors to present advice in regard to management strategy. But in terms of board and corporate governance, and if you talk about thorough job accountability and disclosure, the board members are said to be responsible in terms of accountability and disclosure. And in Japan we don't expect those roles to be fulfilled by outside directors as of yet.

I'm sorry my question is rather lengthy, but you said that outside directors are important. What are they to do? Could I invite your comment? Sir Ronald, please.

[HAMPEL] I would like to emphasize a point that Tom McCarty made. It would be impertinent of anybody practicing outside Japan to suggest that your corporate performance could be substantially improved by the imposition of standards which have become acceptable outside. At the end of the day, what all of us are talking about is corporate efficiency. And over the past 50 years Japan has played as significant a role in the improvement of corporate efficiency as any country in the world. So it's very important to put this into perspective.

Let me then illustrate two situations before I directly answer the question. When I joined ICI, in which I spent 44 years, in 1955 it had a board of 34, of which 3 were outsiders and 31 were insiders. When I retired from ICI as chairman in April this year, we had a board of 11 of whom 6 were outsiders and 5 were insiders. That was an evolution which had taken place over the past 40 years, the majority of it in the last 20 years. The process of evolution had come about not under the demands of the shareholders, because those have been in latter years. They'd come more through the demands of the corporation to improve its efficiency so that it could perform better through all the measures that we wish to see.

The second point I would want to make is that I sit on a U.S. board now and I have sat on another one. And there is a difference between the U.S. and British boards, which is, I think, quite interesting. By and large, U.S. boards have one or maybe two insiders on the boards. British boards which were predominantly, 30 years ago, insiders are now roughly half and half. As a U.K. practitioner, I tend to favor the U.K. situation and I would, wouldn't I. And I do it for two reasons. The first is that I believe that a very powerful chairman and chief executive in a U.S. situation, a single individual, can dominate a board in a way which is less possible in the U.K. environment, where every presentation to the board is made in the presence of colleagues who have equal status as directors.

And secondly, as Tom McCarty said earlier, one of the primary responsibilities of a board is to pick succession, is to ensure the next CEO, the next chairman are correct. And one of the problems for any board is the exposure of other people on boards, other members of the management team to those members, so you can make the best choice.

Now I make this illustration not to suggest the U.S. situation is wrong or the U.K. situation is better. I favor one, but I'm the prisoner, as everybody is, of their own experience. To me, you need to examine the situation in the context of national tradition, national heritage, peculiar circumstances with individual companies, balance of experience. But to go to the direct question as to what is the role and what is the position, what are the benefits of outside directors, it is quite correct that in no circumstances can an outside director, an independent outside director, have the knowledge of the business to be able to run that business, nor should he. But provided you get people of adequate experience and background, they can test the assumptions, the strategy, the performance of the company in a more rigorous way than people who do not sit in the boardroom -- the shareholders. They can act on behalf of the shareholders and the stakeholders in that regard. And they can also provide the essential background work to test their accountabilities, to set in place adequate audit and to ensure there is proper remuneration both for the benefit of the employees and for the benefit of the shareholders and other stakeholders.

It is not an easy role and it is difficult role on a part-time basis. But I would suggest that it is a better role than shareholders who sit at a distance from a company and it has been proven over time to produce a better balance than either a board which has no outsiders or a board which is dominated by insiders.

[KANDA ] Thank you very much. What about you, Mr. McCarty?

[McCARTY ] I would not argue which system is best. I think they are a product of their environment. I believe the U.S. system, where there are very few executive directors on a typical board, is driven by this idea of checks and balances of an independent oversight of management. And it again is driven by the makeup of the shareholders with institutions demanding that there is such a system of checks and balances. Now there are dysfunctions in having outside boards. The amount of time that these people can spend; the selection of outside board members can go in two directions. In some companies, the CEO, when the chairman of the board are one and the same, and that person has great latitude in who is serving on the board, and at the end of the day there may not be too much difference between who's sitting on the board, and if they were all insiders.

There is also social pressure in the U.S. to have boards that are diverse. And therefore, some selections for board seats are made for those kinds of reasons rather than for strict business acumen. So I don't want to imply that the outside directors is a perfect system. I think it is a necessary system in the context of the U.S., and I think there is value in having some number of outside directors. And if you recall back to my remarks, if you agree with what I said that one of the roles of the board is to select the CEO, I think it is quite difficult for a board of insiders to have the same objectivity and ability to select a future CEO. I think that is quite difficult and I think with the outside directors, probably that system has an advantage, I believe, in the CEO selection process. Likewise, in the audit committee that Sir Ronald mentioned, that is typically only outside directors in a U.S. corporation. And again, that independent somebody taking an objective look on the company's finances and so forth, I think, is quite a valuable function.

[KANDA ] Thank you very much. I think external directors or outside directors will increase in Japan in the future, and there are recommendations within Japan that that is the desirable direction to pursue. But Mr. Ueshima, this idea of outside director or the creation of an auditing committee or nomination committee of the successors, it seems a distant idea given the current conditions in Japan. What do you see of the future?

[UESHIMA ] The outside directors, well, in my company currently, as of today, there are none. We have external auditors but no outside directors. We used to have some, but within the board system, inviting an outside director as a member will be important, and I think it is desirable that we have more outside directors from here on.

But why do we have so few external directors in Japan today? My understanding of the situation is that, first of all, Japan companies are lagging behind. And as Sir Ronald mentioned, in the past 40 years, and in the latter 20 years in particular, external directors have increased in the West. It is often said about Japan that even if one were to seek external directors, it is difficult to find people who can fill the role or the requirements. But just because we have difficulty finding such resources, we shouldn't conclude that they are not required. My situation is, at one time, I've tried to look for external directors, but I was not able to find many of them. But we have to increase this. They can first serve on the board of an advisor for the company, but as we see an increase in external directors first serving as an advisor, I think we will have a larger pool of external directors who are qualified and who are capable of fulfilling the required role as true external director.

I have a different view about executive or non-executive directors, but as far as the auditor system is concerned, I agree that there should be external auditors, and indeed we are having more external auditors and fully accredited CPAs have to be used for corporate auditing purposes. And that's actually been done in Japan. So the use of external auditors has been implemented in Japan. I think the situation is going to improve.

External directors, reflecting upon the situation of my company, instead of abandoning the idea because we do not have good enough candidates, we should rather try to increase them by hiring them first.

[KANDA ] In interest of time we think we have to change the subject or tone of discussion somewhat.

Sir Ronald, you talked about the purposes or objectives of corporate governance. In other words, for whom should a company be managed? For whose benefit should a company be run? You mentioned that it should be for the benefit of all stakeholders including shareholders perhaps at the top of the list, but also this would include employees and community. There are all kinds of stakeholders to reckon with, and it's for them that a company should be managed.

And to Mr. McCarty, you talked about the American model which pursues the shareholders' profit foremost. So there's a slight difference. But then again, should a company be run solely for the benefit of shareholders? Probably not, particularly if you are talking about the large public companies; the benefits are served more than just to shareholders.

Now my question is -- maybe this is particularly unique to Japan. There may be conflict of interest amongst and between various stakeholders: Who should you go for? Often when we talk about examples of a Japanese company is that when Japanese companies are lagging in their performance, the question is: Should we cut off the payment of dividends or should we cut off employment? If you are forced to choose between the two, in the postwar Japanese context, Japanese management has always cut down on dividends instead of reducing employment. When the Japanese economy was growing at a high speed, Japanese companies emphasized the stability of employment; employment stability came first. Of course, this does not mean that the shareholders' profits were neglected, but if one were forced with the choice between shareholders' interests and employees' interests, the shareholders' interests were put on the back-burner, so to speak.

Now coming back to my question, if there is such conflict of interest among stakeholders, who do you vote for, so to speak? Who do you choose? In the age of globalism would it be better for us to think in favor of shareholders' interest? Mr. McCarty first?

[McCARTY ] I'm trying to remember my Bible history. There is a story in the Bible, I think it's about a man named Solomon, and there were two ladies who were fighting over a baby, each saying the baby was hers, and came before King Solomon for a ruling. And King Solomon said, I will solve this by cutting the baby in half and giving half to each of you. And one of the ladies said, No, no, no. Don't do that. And Solomon said, Ah-ha! I give the baby to you because you... Well, the question you just asked me, I think, is a little bit like trying to cut the baby in half. I don't think there is an answer to that question.

Mr. Welch this morning I thought put it very well when he talked about the American view on restructuring. He had a deep concern for the employees in General Electric. He and his company were very interested in their future, but when they had businesses that did not have a future, then they felt it was in the best interest of the company and of the employees, perhaps not in the short-term best interest of the employees, but in the longer-term best interest of the employees, that they jettison that business and let it go elsewhere.

I think most enlightened American companies think that way. You know, they have a deep concern for their employees, but they believe that for their long-term competitiveness they have to take these kinds of actions. And so at the end of the day, I think you would find most large public companies, you know, the pressure for their earnings and so forth, they would do the restructuring, but would do so for what they would suggest are short-term reasons for the longer-term good and health of the enterprise.

[KANDA ] Thank you.

[HAMPEL] I share Tom's view that there's no answer to this question. All I would say, I think, is that the pressures on modern management are extreme and a great deal more difficult than they were 15 years ago when I first became a CEO. Today's management have extreme short-term pressures. The U.K. situation is somewhat different from the U.S. in the sense that institutional shareholders -- and in particular, pension funds because of our pension system -- hold a very much higher proportion of our shareholdings. Pension funds are very critical of investment returns. They put very substantial pressure on investment managers. Investment managers, in turn, put very substantial pressures on management. Shareholders own companies, and as Thomas illustrated, shareholders can remove CEOs and they can do that just as easily in the U.K. and do so as they do in the U.S.

Against that background, there is inevitably an increasing pressure on corporations for short-term performance. And today's skill -- and if I might say so, Japan has demonstrated this historically better than most -- the long-term nature of corporations is under attack, and it is critical that managements maintain their nerve under this pressure. But it is the responsibility of boards to balance the short- and the long-term, to balance the interest of shareholders and stakeholders. And I think it is a very strong argument in favor of outsiders that this balancing should not be done solely by those who are internal and whose experience and prejudice is all based on their experience within the company.

Let me illustrate a story to you by a visit that my wife and I paid about 18 months ago to India. ICI, the company I was chairman of at the time, had a very substantial explosives business in India. We built a plant in 1957 at a place called Gwalior which is miles from nowhere. And as a result of building that plant, we employed about 750 people and we built a school and we built a hospital. That school has now 1,200 pupils, about half of whom are children of ICI employees and the other half are children of other people in the area. There is no other school of comparable quality within 150 miles, and it's among the best ten schools, by results, in India. The hospital is the only hospital within 200 miles; has an operating theater, five doctors; it provides not only for our employees, but it provides a very strong social infrastructure. The explosives business in India is losing money. It is losing money because its primary customer, Coal India, which is a public corporation, does not pay its bills on time. What should a management do? The instinctive reaction is you should shut the business. If you shut the business, the social infrastructure collapses. That is a stark reminder of the dilemmas that don't tend to face us in this country or face us in the United States or in the U.K.

I'm happy to say that the particular problem there has been resolved, first because the business is now making some money; and secondly, because we have established a trust and over ten years the hospital and the school will become part of the public sector with support from the company. But that sort of dilemma in terms of public responsibility faces every board. And my view is that you can't draw down rules; you can't say in all circumstances: This is the answer. But at the end of the day, if the board does not take decisions which were in the long-term prosperity of the business, then the business will fail and all the support we give to all our stakeholders will collapse.

I said at my retirement party within my own company that my successor was going to have a doubly more difficult task than I did, simply because these pressures today are all done in the public eye. They're in media exposure. Every decision you take is now a public decision. 20 years ago, 15 years ago, they were private decisions.

So there isn't an answer to your question, but it provides, if you like, a very simulating reason for going into business.

[KANDA ] Thank you very much. Mr. Ueshima, could you comment?

[UESHIMA ] Well, regarding this question, I think there is no one single answer for which out of the two choice you will be choosing. As I have said clearly, there should be a very good balance struck between the shareholders and stakeholders; management should be conducted in balance. And therefore, I believe that the answer that I can give you right now is, that is what we are going to manage in the coming days.

[KANDA ] Thank you very much. Then we would like to move on to the next topic. In relation to global governance, this is something that Sir Ronald has pointed out, but general shareholders' meeting in the major company was one topic that was mentioned. I'm specialized in law, and that is in the U.S. or Europe or Japan it is the same thing. But it is stipulated that the shareholders' meeting will make decisions. And what Sir Ronald has pointed out is that using the shareholders' meeting as a place for decision-making is not really revealing the fact; all the decisions are made before the shareholders' meeting are convened. And therefore, I think you have used the word, small-shareholders, but the shareholders' meeting is the place to disclose information to the general investors, and also you have used the word, cross-examining, but minority shareholders or ordinary investors are going to check the business and they are going to ask questions. And I think Sir Ronald's report says that the nature of the general shareholders' meeting should be changed toward that direction.

So, perhaps some of the lawyers, or people in the law faculty, are coming up with the idea of: Why don't we do away with the shareholders' meeting? But what happens if the general shareholders' meeting is discarded? And I'm very interested to know the view of Mr. McCarty about this aspect on the general shareholders' meeting. What is the reason for the general shareholders' meeting's existence and what they should be doing?

[McCARTY ] I think the general shareholder meeting, by and large, in the U.S. is a very perfunctory and not very meaningful meeting. The votes that are taken have essentially been done by the solicitation of proxies, and really, as Sir Ronald suggested, the decisions have all been made. So it essentially -- but with a few exceptions -- essentially turns out to be the chairman giving a somewhat glowing report, serving some tea and coffee, and perhaps occasionally one of these so-called corporate gadflies, may be a little bit like you have sokaiya, but not quite, but a little bit like that. Such people turn up and maybe will ask some embarrassing question. But by and large, the shareholder meeting in a large American public company is not very meaningful, I would say.

[KANDA ] Do you think they should do away with that, the general shareholders' meeting system?

[McCARTY ] Well, I'm not familiar with -- I suspect it is a legal requirement to have an annual shareholders' meeting, and, you know, I don't have a particular view on whether or not it should go away, but I don't believe it serves much purpose in today's large public company environment.

[KANDA ] Thank you. Mr. Ueshima, I think it is very difficult to realize the most relevant use of the general shareholders' meeting.

[UESHIMA ] Well, I totally had no idea of doing away with, discarding the general shareholders' meeting, so I was sort of stunned to hear your point. But according to the Japanese commercial code, we could not do away with the general shareholders' meeting. That is clear. But how are we going to conduct the general shareholders' meeting and general shareholders being not the only venue or opportunity but thinking of other ways of conveying information to the shareholders, be it on the interim basis or periodical basis. I think this is an aspect that we should be giving more thoughts. But the possibility of answering your question of whether we should do away with the general shareholders' meeting, yes or no, I've never even thought about it, and I don't think it's possible to discard the system.

[KANDA ] Maybe I didn't use the right expression. I'm not of the opinion that we should discard the system, but regarding the general shareholders' meeting from the viewpoint of corporate governance, what should the shareholders be expecting from it, to make it a more relevant existence?

[UESHIMA ] Well, speaking about the reality, be it at the end of the fiscal year or election of the board members, et cetera, with the approval of the general shareholders' meeting, for the first time the company is allowed to go into the next fiscal year's business. And therefore, for that purpose, as a company in order to take the overall stock of what has happened in the past year and to plan for the next year, I think it is a very important moment or opportunity.

And being very honest, including myself, my company uses it as an opportunity to take stock of what we have done in the past year. And another is, what we should be conveying to the shareholders. What should we be reporting to the shareholders? I think that we should be making all efforts to improve it. So the opportunity should not only be limited to the day of the general shareholders' meeting.

[KANDA ] Sir Ronald, about the annual general shareholders' meeting, in the U.K., is it the general consensus that efforts to improve should be made in the way you described earlier?

[HAMPEL] Well, I think there are perhaps two or three things I would want to say in this area. The first -- and it's perhaps almost heretical -- is to say that you can say to a shareholder who is disenchanted with your performance, "Why don't you sell the shares?" It's not something which chief executives say very often, but at the end of the day the shareholder has the right to do that. And I said that in the context of what the role of a shareholders' meeting might be. It is a legal requirement in the U.S. and it is a legal requirement in the U.K, and I imagine also in Japan. It is, at the moment, a legal requirement in the U.K., as I said earlier, to have voting at the AGM. I believe that should go. I think that is nonsense and we should dispense with that.

But I do think there is a case for a more constructive use of an AGM by the management to make themselves available to any shareholder who wishes to come. And for the chairman or chief executive to deliver a rather better presentation, the sort of presentation he might deliver to one of his major institutional investment houses, to those shareholders. Now there's a particular problem in the U.S. because it's such a large country, and you can't in fact hold your AGM all over the place. But with modern electronic means, it ought to be possible now to access or enable people to have access.

And so, instinctively, I am down the track of believing that we should have a form of annual meeting at which management present in a great deal more detail than they have done traditionally the performance of the company in language which the average shareholder can understand and enable that shareholder if he so wishes to ask questions. But nobody should be under any illusions that that is actually about the management of the company. It's a communication exercise; it's not about the legal framework of a company. So that's the direction in which I would go, and I think that's the direction in which companies generally are moving in the United Kingdom.

[McCARTY ] Could I make a comment? Perhaps the most famous annual shareholders' meeting in the United States is a company called Berkshire Hathaway, which is Warren Buffet's company. Warren Buffet used to be the richest man in the world -- I don't think he is anymore. But he had tremendous success in building businesses for the long term and investing in businesses. And the stock of his company is, one share is approximately $25,000 US. So the number of shareholders is not so big. He lives in called Omaha, Nebraska, which is a small city in the middle of the United States. And once a year they have an annual shareholders' meeting, and thousands and thousands of shareholders congregate there and he treats them to a baseball game, and they have parties, and he gives a very enlightened speech, and it's the kind of speech that everything is wide open. And it is really a -- probably what was intended in the annual general meeting, it's sort of shareholder democracy, and the CEO opening up and telling everybody everything. And this has been arguably one of the most successful companies in the world over a very long period of time.

[HAMPEL] Could I add one other thing too. There is an issue about shareholder meetings, which is becoming increasingly difficult to deal with in the U.K., and I know the U.S. has had similar problems and so in Europe. And that is when special interest groups buy shares simply to disrupt a meeting. Now you can't in a democracy prevent that, nor should you prevent it. But if it actually disrupts the business of the corporation to the extent that resolutions cannot be passed, then it is counterproductive. And it seems to me that the quid pro quo for making voting a postal process, which is then declared, if you like -- the results are declared at the meeting -- the quid pro quo for that is for managements to make themselves available to these special interest groups as well as, of course, to the normal shareholders.

[KANDA ] Thank you very much.

Mr. McCarty talked of the corporate management in the globalized era and the likely increasing trend of M&A activities. He also referred to the e-commerce era. What about corporate governance in the e-commerce era?

So all in all, when we look at corporate governance in globalized management or corporate governance in the e-commerce era, and when we think of that, is it necessary to be stipulated by law, or is it something each company would adopt on its own? Or, earlier, the stock exchange in London was discussed. Is it something the stock exchange would require the corporations to adopt in corporate governance? Well, I specialized in law, but my view is that it should be left to the voluntary choice of the corporations; corporate governance is not something which should be imposed on companies by law in the e-commerce era or globalized management era. But when it is left to the free choice of the companies, then some companies may be very slow about introducing the outside director system and so forth. So I cannot say one way or the other.

Therefore, in terms of the improvement of corporate governance, is this something which should be done by law, or in terms of voluntary rules of the stock exchange and so forth, or should it be left to the voluntary choice of the companies? Mr. McCarty?

[McCARTY ] I agree with you. I don't believe the impact of e-commerce introduces any new need for legislation with respect to corporate governance. I think the impact of e-commerce, I believe, is really more at the need for companies to be aware of what is possible with e-commerce and having strategies that enable them to take advantage of it. And also, to be aware of some of the trends that are occurring, and maybe having to change their management policies to deal with such trends. And I mentioned in my remarks this compensation thing, which is becoming very much of an issue in the United States, because so many companies are now substituting share options for normal compensation and young people in particular are drawn toward these kinds of companies. It is becoming a business issue for normal companies to attract and retain the talent that they need in the e-commerce arena. And I think that is one of the business problems that companies have to deal with. It is not strictly a governance problem, but it is something that the board should insist, that the management take a position on and know how they are going to deal with it.

Now I would also say that this could very well be quite a short-term phenomenon, because these kinds of schemes are all terrific, as you in Japan know, in a bubble economy, and for the last decade the share market in the United States has gone one way. Now when that goes the other way, which is inevitable, this issue may not be as much of an issue, but today, it is certainly a strain on companies in the U.S. to adjust their management systems to deal with this phenomenon.

[HAMPEL] I have a very simplistic view about the role of legislation in this field. Legislation should basically require appropriate accounting standards, so that the reports of companies are produced to a common and appropriate standard. And secondly, they should require full disclosure. And full disclosure in the governance field means, how you structure your board; how you manage your company; how you run your remuneration system; how you run your audit, and so on. And external pressures, led by shareholders, but also imposed by public opinion, will bring about appropriate changes in the system of an individual company if they do not satisfy. I am very much against a formulaic approach which suggests that all companies should be run absolutely identically in all circumstances. It simply won't work.

I'd make a comment about Tom McCarty's last remarks about remuneration. ICI had on its board some years ago a director who served on a board of General Motors, and this goes back about ten years. General Motors had a period of three or four years where it did not perform. And its middle-rank employees left in droves because the remuneration system had been based on share performance. And the shares didn't perform; they weren't rewarded; and they left and they went to the competition. It didn't take General Motors long to change the reward system. Cynically, I would say, that the current reward systems, which have been retained particularly in the U.S. based on the bubble stock market, will change very fast when that bubble breaks.

[KANDA ] Thank you very much for your very interesting point. Mr. Ueshima, in Japan people say that unless it is taken in the form of legislation, people will not follow. But I think that is no longer true in Japan.

[UESHIMA ] Well, I have the view that the fewer the legal measures, the better. But as a guideline, for example, such as the guidelines of Tokyo Stock Exchange, they could be used as to how they would conduct their business; it's not a law, but it's a guideline, for instance, published by Tokyo Stock Exchange, and this guideline is distributed, and people will follow if they consider it is appropriate. And if they do not adopt those guidelines, then I think those people would be required to make further disclosures. I think that is a good system.

[KANDA ] Now I think it is opportunity to invite questions from the floor. Please raise your hand.

[QUESTION] Thank you. I'm Tsunoda from Nagoya. I'm a bicycle manufacturer. At our general shareholders' meeting, at present, referring to what he has said about being in the straightjacket of the law, well, we tried to do many things. However, on the other hand, the people who are in charge of writing that shareholders' meeting, et cetera, we are always discouraged from making these new changes. And therefore, we have divided the meeting into two parts -- the shareholders' meeting and the meeting to explain about our business performance. And in this business performance announcement session we have made a situation that it would not be stipulated by the law, and also it's not that I'm going to be in charge of the whole operation of the representation meeting, but the staff will be in charge. And also for the general shareholders' meeting, during the break time, in order to listen to the voice of the shareholders, as we listen to the customers, we tell our staff to distribute a questionnaire form from the consideration of giving out adequate service. But the people on the general shareholders' meeting side said, Don't do that, because if we do that, then many people who are not at the general shareholders' meeting will be coming in order to ask questions, and that is prohibited by law.

So we are making various trials. All those new trials are being conducted at the business performance explanatory meeting. And so, regarding this method of dividing the meeting into two different sections, I would like to invite your comment, dividing them into general shareholders' meeting and the explanatory meeting for business performance.

[UESHIMA ] Well, I think that is a very admirable method, to be very simple. As has been mentioned during the day today, those legal requirements of the general shareholders' meeting are still in existence. And so the exchange of views with the shareholders, if by dividing them into two parts, if you can do that in more a face-to-face manner, by a more direct method, I think that is a very admirable way of coping with the shareholders.

[KANDA ] In the U.K. and U.S., along with the general shareholders' meeting or the AGM, is there a possibility of that kind of presentation meeting of the business performance?

[UESHIMA ] Well, I'm not an American nor British, but when I was in New York I participated in the shareholders' meeting of Rockwell, and after the adoption of the resolution was over, then there was this Armstrong, the astronaut who went to the space, and there had been many Rockwell product displays in relation to Armstrong's success, and many people came in and out of that display corner, where tea and coffee were served, I think it was conducted for about three or four hours.

[KANDA ] In Great Britain, are there any actual examples of that kind of presentation meeting?

[HAMPEL] The specific requirements of law in the U.K. require there to be a vote taken at the meeting publicly... My experience of the U.S. board that I sit on at the moment, Alcoa is very similar to that just described in the sense that the resolutions are tabled by the secretary at the outset of the meeting, with the proxy votes received, and the formal business of the meeting is completed in about two minutes. There is then the debate about the business. And the particular chairman involved has developed a very agreeable system in a sense that he has an easy delivery and a very descriptive manner for the business. But it is not a sophisticated, numerical exposure of the company strategy; it is more, if you like a man-in-the-street version of where the company is going.

[KANDA ] I think, Mr. Tsunoda, your way is becoming a globalized method now.

[QUESTION] My name is Sugata from Intertrust Management. My question is directed to Mr. Ueshima. Earlier, in your presentation, you mentioned you are a bit negative about the executive officer system. What's the reason for that?

[UESHIMA ] It's not that I refute the efficacy of the executive officer system, but in terms of the commercial code, the status of executive officers is not clearly defined. And in one respect, the executive officer system is introduced just to reduce the number of the members on the board and it is considered as a means of reducing the number of board of directors, but still giving them the titles. That may not be useful.

Also there may be a difference from one sector of the business to the other, where the executive officer system may work easier and better. Compared to the manufacturing industries, the type of company we have an easier time introducing the executive officer system. But if we were to introduce that where the position and title of executive officers are not very clear, in terms of the commercial code, it may not be quite a time yet for us. So this has been the process of judgment on our side. That's why I said that I'm not for the executive officer systems altogether.

[KANDA ] I've received a note that we'd have to bring this gathering to a close. In the remaining ten seconds, I shall attempt to conclude and summarize this session.

What's the significance of corporate governance in globalized management in the era of e-commerce? It is very important. It's a common perception throughout the world, because corporate governance would affect the performance of the company. And the awareness is increasing in that sense.

What is good corporate governance? That is naturally the efficient pursuit of corporate earnings, but the process would ensure the transparency and fairness and accountability. So corporate governance would ensure that accountability, transparency, and fairness.

What sort of corporate governance mechanism would ensure this? What are the functions needed? There isn't a one definite model alone, but there could be a multiple number of models which one could look at. So we see the competition of corporate governance in various parts of the world. In that sense, as Sir Ronald and Mr. McCarty mentioned, we are now witnessing the evolution of corporate governance. But the fact still remains that corporate governance would affect the corporate earnings and the state of a company itself. And it is becoming the universal recognition and awareness that corporate governance is very important. In that sense, we will be seeing the increasing discussion on corporate governance, and the corporate governance will not disappear in the stage of the discussion.

Thank you very much to Sir Ronald, Mr. McCarty, and Mr. Ueshima. And our appreciation goes to the audience as well. Thank you.