Pay disclosure law goes too far
The rule imposed by the Financial Services Agency on corporations to reveal the salaries paid to their executives must be regarded as excessive.
In February, the FSA announced the rule requiring listed companies to disclose the names of senior officials whose annual salaries exceed 100 million yen, as well as how much they were actually paid. This rule took effect in late March.
Under the FSA rule, listed corporations must release, by the end of the month, financial statement reports that include these details, if their accounts were closed in March.
Admittedly, it is important to encourage corporations to disclose meaningful information as thoroughly as possible. However, great care must be taken to protect the confidentiality of corporate executives' private information. In fact, business circles, including the Japan Business Federation (Nippon Keidanren), have strongly objected to the new rule.
It is difficult to say that the pros and cons of the rule were fully discussed before it went into effect. We believe the FSA should reconsider the propriety of obliging corporations to disclose their executives' salaries.
Following the crowd
Before the rule came into force, companies were only required to reveal the total amounts of salaries paid to board members. The FSA has said its decision to oblige corporations to disclose each board member's salary reflects the fact that global financial crises triggered in recent years by turmoil in the United States and some European nations raised questions about the appropriateness of hefty paychecks pocketed by corporate executives in these countries. In defending the disclosure rule, the FSA said the United States and many European nations have introduced similar regulations.
The global financial crises were the end result of ill-advised decisions by executives at some U.S. and European financial institutions to carry out high-return, high-risk investment schemes, hoping to pick up large paychecks. These institutions were too extreme in paying their board members salaries in proportion to their performance. This is not the case with the large majority of Japanese corporations.
There is a marked difference in the pay levels of Japanese, U.S. and European companies. Chief executive officers at listed corporations in the United States earn an average of 3.9 million dollars annually (about 350 million yen). There are 300 U.S. companies whose CEOs are paid an average of 10 million dollars annually (900 million yen). This is in stark contrast to the state of affairs in this country. Board members of listed corporations here are paid, on average, a modest 25 million yen annually.
Shiseido Co. has voluntarily revealed the salaries paid to three board members. The major cosmetics manufacturer's president and another executive receive more than 100 million yen in annual salaries. Shiseido has reason to pay annual salaries on this scale, given its status as a large corporation.
A key sticking point in corporate disclosure is whether company shareholders have suffered losses through disproportionately high salaries paid to the firm's executives, compared with the company's size and business performance. This objective could be achieved under the old rule that only required disclosure of the total sum of salaries paid to board members.
There are concerns that including personal information, such as individual corporate officials' salaries, in financial statement reports could open the door to wrongdoing. These reports can be easily seen by anyone using the Internet. Access to this information online could encourage crimes targeting these officials.
Several years ago, the government decided not to disclose a list of the nation's highest taxpayers. This was because a stream of top taxpayers had been singled out as targets of telephone fraud and harassment. We fear the FSA's disclosure rule could spark similar abuses.
When the FSA proposed the new rule in February, it sought opinions from the public about it. As it turned out, the financial watchdog body received many objections to the rule. However, financial services minister Shizuka Kamei enforced the rule without setting a grace period. "If [a company] doesn't want its [board members'] hefty paychecks made known to the public, they could be reduced," Kamei said.
The rule has been implemented too forcibly and hastily. The disclosure requirement--apparently intended to play to the gallery by taking a swipe at large corporations--is little more than a form of populism.
(From The Yomiuri Shimbun, June 11, 2010)