Introduction
One of the most important initial decisions when establishing a corporation in Japan is to decide on an appropriate corporate governance structure. The corporate governance structure determines how decision-making, business execution, and oversight are structured within the company. Under Japan’s Companies Act, companies have a certain level of flexibility in selecting and combining governance bodies, provided that the statutory requirements are met.
An effective governance structure should reflect the company’s size, capital composition, and shareholder relationships. This article provides a detailed explanation of the fundamental concepts of corporate governance structure, available legal framework, and practical considerations that foreign investors and startups should understand when entering the Japanese market.
■Understanding Corporate Governance Design
Under the Companies Act, “corporate bodies” refer to the entities responsible for making decisions and executing actions on behalf of the company. These include both individual officers and collective decision-making bodies such as:
- Shareholders’s Meeting
- Director(s)
- Board of Directors
- Statutory Auditor(s)
- Board of Auditors
- Accounting Advisor
- Accounting Auditor
- Committees (e.g., Nomination Committee, Audit and Supervisory Committee)
Among these, only the Shareholders and Directors are mandatory for all stock companies (Kabushiki Kaisha or K.K.). Other corporate bodies may be established depending on the company’s type and scale. The Companies Act provides flexibility, allowing each company to adopt a corporate structure that suits its management style and level of complexity (e.g. public company/private company, large company/small and medium-sized company).
■Public and Private Companies
When considering the corporate structure design, the first distinction to make is whether the company is a “Public Company” or a “Private Company.” The Companies Act imposes different constraints on corporate structure design based on this distinction.
A Public Company is a company that does not impose restrictions on the transfer of its shares in the Articles of Incorporation, thus, its share composition can change frequently. As a result, the Companies Act requires Public Companies to establish a Board of Directors (Article 327, Paragraph 1, Item 1 of the Companies Act). A Board of Directors requires at least three directors to be appointed.
A Private company restricts the transfer of all of its issued shares in the Articles of Incorporation. In many cases, its shareholders and management are the same individuals, which reduces the need for extensive oversight. A private company may, therefore, be established with only one director and without a Board of Directors.
Most foreign-owned companies typically begin as a private company since their shareholders are few and their management structure is straightforward.
■Typical Corporate Structure of Private Companies
Although private companies can adopt several different governance structures, the following are the most common patterns:
| Corporate Structure | Characteristics |
| Shareholders’ Meeting and Board of Directors (Minimal Structure) | Simplest structure. Suitable for sole proprietorships. |
| Shareholders’ Meeting, Board of Directors and Auditors | Strengthens management oversight. Enhances credibility. |
| Shareholders’ Meeting, Board of Directors, and Board of Auditors | For medium-sized and large companies with multiple directors. |
At the initial stage, the representative director and the shareholder are often the same individual. In such cases, having only a shareholders’ meeting and a director allows efficient decision-making and keeps administrative costs to a minimum.
However, if the company intends to raise external capital or engage in transactions with financial institutions in the future, appointing corporate auditors can strengthen oversight and enhance the company’s credibility.
■Establishing a Board of Directors
Although a private company is not required to establish a board of directors, it can be beneficial for a private company to establish one, especially when the management of the company involves the decision of multiple directors, or when external investors are involved.
If a private company decides to establish a board of directors, the Companies Act requires the appointment of at least three directors and at least one statutory auditor (Article 327, paragraph 2). (Article 327, Paragraph 2 of the Companies Act). When a board of directors is established, shareholders have limited opportunities to participate in management (a separation between ownership and management). Therefore, the appointment of corporate auditors is mandated to monitor the directors’ management on behalf of the shareholders.
In practice, having a board is also viewed favorably by Japanese business partners, as it demonstrates a commitment to sound corporate governance.
■Mandatory Corporate Bodies for Large Corporations
A company will be classify as a “large corporation” when its registered capital reaches 500 million yen or more, or total liabilities reaches 20 billion yen or more.
When this threshold is met, such corporate is required to appoint an accounting auditor (a certified public accountant or audit firm), and adopt one of the following corporate bodies:
- Board of Auditors
- Audit and Supervisory Committee
- Committee consisting of Nomination Committee, Audit, Committee and Compensation Committee
In addition to the establishment of these corporate bodies, the appointment of outside directors is also required. This practice aims to clearly separate business execution from management oversight and strengthen the oversight system through outside directors.
■Key Considerations for Foreign Companies
When foreign executives or investors establish a company in Japan, the following practical points should be carefully considered:
1.Choose a Structure that Enables Swift Decision-making
In the initial stages, a simple structure consisting only of a shareholders’ meeting and directors is preferable. A board of directors and auditors can be added later as the business expands.
2.Establish Corporate Bodies that Enhance External Credibility
For fundraising and partnership with Japanese institutions, a more developed corporate structure, such as appointing auditors or establishing a board of directors helps demonstrate reliability and transparency.
3.Be Mindful of the Costs associated with Establishing these Corporate Bodies.
Introducing a board of directors and auditors entails additional administrative responsibilities and personnel costs. These should be included in the company’s overall management and budgeting plans from the outset.
Conclusion
Corporate governance design is more than a legal formality. It determines how authority and accountability are distributed within the organization and shapes the company’s culture of management and control.
Japan’s Companies Act provides flexibility while setting clear requirements based on the company’s classification and size.
For foreign companies and startups, understanding these frameworks and selecting a structure that suits the business stage and strategy are essential steps toward establishing a stable and compliant operation.
GVA International Law Office advises both the optimal organizational structure tailored to each client’s specific circumstances. When considering entering the Japanese market, please contact us.
