Directors are elected by shareholders and their relationship with the company is a mandate, not employment. They owe a duty of care and a duty of loyalty, and they are liable to the company for losses caused by neglect of duty and to third parties where they act in bad faith or with gross negligence. The standard term is two years. A company that does not publicly trade its shares can extend it to ten years in its articles. A company with a board needs at least three directors, while a small company without a board can have just one.
Japanese companies have traditionally filled boards with insiders, many of whom also hold an employee post. Directors rank among themselves as jomu, senmu and so on. That is changing at listed companies. Since March 2021 the Companies Act has required large public companies with a statutory auditor board that file annual securities reports, which covers many listed companies, to have at least one outside director, and the Corporate Governance Code asks for considerably more.
Shareholders can remove a director at any time by ordinary resolution. A director removed without just cause can claim damages, but Japan's dismissal protections do not apply to the directorship itself.
What it means for a foreign employer
- A subsidiary directorship carries real liability. Appointing your country manager or a regional executive to the board makes them personally exposed. Arrange directors' and officers' cover.
- Remuneration rules are tax rules. Director pay is generally deductible only if paid in fixed monthly amounts or under pre-notified arrangements. Discretionary bonuses for directors are usually not deductible.
- Separate the board seat from the job. If a director is also an employee, document both relationships. Removing the seat does not end the employment.
- A board seat is a negotiation point. Senior Japanese candidates may ask for one for standing. Consider whether you want the liability that comes with it.
- Different exit rules. A board director holds a mandate from shareholders, not an employment contract, so the employee notice period and dismissal protections don't apply in the usual way. Settle start-date timing and handover expectations with that in mind before the offer.
Sources
- Companies Act, Articles 327-2, 329, 330, 331, 332, 339, 423 and 429.
- Corporation Tax Act, Article 34 (deductibility of directors' remuneration).