A woman stands up in a meeting behind closed glass doors, talking to a committee with board diversity as men in suits blur past in the foreground
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If you asked a dozen people to name a dozen things that would meaningfully impact diversity in businesses, you’d probably get a few repeat responses. We often hear the call for better management training, blind hiring, stronger HR support systems, and a new approach to business strategy.

Corporate governance guidelines might not make the list. But it should.

The philosophy that corporate governance and diversity go hand in hand is precisely what drove Tracy Gopal to found her company, Third Arrow Strategies. Named for the late Japanese Prime Minister Shinzo Abe’s third “arrow” of economic reform, the company is taking on board diversity as part of a larger mission to strengthen corporate governance in Japan.

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Why? Because “the way you stimulate investment is by showing investors that Japan has changed,” Gopal says. And one of the most crucial areas in which the country needs to change is diversity.

Japan has been a constant thread in Gopal’s professional journey. Her interest began with studying Japanese in 1988, and it held strong through fifteen years navigating the world of M&A and banking with major players like Ernst & Young (EY) and GCA, during which she visited Tokyo on frequent business trips. Then, after attending a 2006 conference on corporate governance held by the Japan Society of Northern California, she made a thoughtful decision to transition to corporate governance and pursued a career with ISS, the world’s largest proxy advisor.

Eventually, she founded Third Arrow Strategies.

“Lifelong interest and low-hanging fruit—that’s what it comes down to,” she says. “There was such an opportunity to make a difference. I realized that by mobilizing the leadership of my network and dedicating myself to the advocacy of board diversity, I could actually have a significant impact on corporate governance in Japan.”

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A Brief History of Corporate Governance in Japan

Corporate governance is the set of rules, laws, and practices that keep companies in line and provide value for internal and external stakeholders. The stronger a company’s corporate governance, the more accountable that company is for how it does business.

The people in charge of enforcing corporate governance are the members of the board. Therefore, to ensure fair corporate governance, meetings of the board need oversight—independent oversight for objectivity.

Historically speaking, corporate governance in Japan has been weak due to boards comprised of internal employee directors. That is to say, the people managing the company come from within the company. And though it may seem like they’d naturally know what’s best, as Gopal puts it, “You have no management oversight if management is your board.”

While much of the world has achieved majority board independence, Japan is still chipping away at the one-third mark.

A Tale of Two Capitalisms

Corporate governance in Japan vs. in, say, the US is a product of conflicting philosophies of shareholder capitalism vs. stakeholder capitalism.

In shareholder capitalism, a company focuses primarily on giving investors a return.

Stakeholder capitalism, on the other hand, takes a much wider scope of responsibility. “Japanese companies focus on all the stakeholders: the community, the people, the employees, etc.,” explains Gopal. “And that’s why a Japanese company will operate at a loss if it means keeping everybody employed. It’s part of the community responsibility.”

It’s not so surprising that Japan, which tends to be very harmony- and group-focused, naturally gravitates toward stakeholder capitalism. Nor is stakeholder capitalism fundamentally a bad thing. Klaus Schwab advocated for stakeholder capitalism in his 1973 Davos Manifesto, and today, much of the business world is finding that this community approach has great benefits.

But without strong corporate governance, important parts of the community can be left behind—like women.

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The Role of Corporate Governance in Board Diversity

Boards of internally promoted directors in Japan have tended to consist of all men of a similar age who think alike, share similar life experiences, and perhaps even joined the company together. Unsurprisingly, these boards lack cognitive diversity. As a result, they visibly struggle to include women and other underrepresented groups—not for lack of evidence that they should.

As Gopal notes, “A lot of studies show that women on boards lead to greater performance, greater oversight, better retention of female staff, and better candidates.” The numbers are there. It’s independent oversight on board decisions that’s lacking.

But the head-in-the-sand approach won’t last forever.

“People used to call it a societal issue, a fairness issue,” says Gopal of raising board diversity. “Nobody talks about board diversity anymore in a context of fairness. It’s talked about in a context of long-term sustainability, board performance, and board governance.

And the Role of Greatest Change-Maker Goes to…Investors

Corporate governance didn’t spring into being overnight, and it certainly took time to evolve into what it is today. Gopal explains that even in the US, boards were initially composed of internal members first. Independent directors didn’t start appearing until the 1950s.

“Corporate governance has evolved so much over the past decades,” stresses Gopal. “As boards started to be held to higher standards, they naturally evolved to prevent fraud or other issues. Today, we’re being asked to disclose the gender gap and CEO-to-employee pay. Nobody had to do any of that before. It’s an evolution of the societal times.”

In recent years, investors are becoming the big drivers of that evolution, even when it comes to corporate governance in Japan. Companies have a responsibility to follow a corporate governance code (and applicable laws), but it’s investors who make sure they actually do—on penalty of losing investment.

And Gopal explains that investors have found the perfect arena for making their intentions known: annual meetings.

Held in June in Japan (during the world’s shortest proxy season), annual meetings give investors a platform to vote on various ballot items, including confidence in chief executive officers. Recently—very recently, stresses Gopal—investors have started wielding this voting power to vote against CEOs or nominating committee chairs if a board doesn’t have at least one female director.

“For a while,” says Gopal, “many investors had this kind of policy in the US, but they left Japan alone. Now, many foreign investors are changing their policy. They’re voting against the CEO, and companies with significant foreign investors are taking note.”

Investors have other powers to incite change, as well. Gopal cites the Women’s Empowerment Index by MSCI, which includes companies with favorable empowerment metrics such as female board directors and women in management.

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While it’s unfortunate that these point to external factors evolving corporate governance in Japan, Gopal is hopeful that it’s a foot in the door. “At least it’s making change,” she says. “And I do believe that once the women are in place, we can shift the society.”

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Corporate Women (and Men) of Japan’s Future of Work

The Japanese corporate world still has plenty of barriers that need to come down for women. But Gopal says, with some awe, that the last two-to-five years have seen exponential rise in female empowerment and even board diversity in Japan.

And, as with many advancements in feminism and diversity, women aren’t the only ones benefitting.

“Even ten years ago, women were still rare in companies, as well as on boards. They still did most, if not all, of the housework and childcare. The long hours famously demanded by Japanese companies were quite common. There wasn’t the flexibility to go home.”

Now, with more women in the corporate world, many of the traditional corporate practices that ran men ragged are breaking down. This means more and more people are getting on the diversity train, and excuses for not embracing diversity are weaker than ever.

3 Stages of Diversity, Equity, and Inclusion

Despite advancements in corporate governance in Japan, many companies still fall back on the excuse that they simply can’t find suitable candidates who are women, often due to needs in their particular industry. Gopal has a ready response to that: It’s 2022.

“Abenomics started in 2015, so companies with that excuse have had six years since the memo. If you could not find a woman in six years, then there’s a flaw in your process. Many times, companies do not have a solid process for finding a qualified female board candidate, and without a deep understanding for why gender diversity is so important, they fall behind.

Progress on the gender diversity front, for many companies, comes in three stages.

In the first stage, the company accepts that it needs “a woman.” Though management might still be unclear on the why, they’ve at least accepted that much. So the board and its committees learn by doing and set to hiring.

In the second stage, the company realizes it needs to go a step further and hire a woman who actually has a necessary set of skills. And because they’ve already brought one (or even a few) women on board in the first stage, they’ve begun to witness the value of gender diversity during periodic reviews. “They’ll even start to look forward to asking for the next woman’s opinions,” says Gopal.

Then comes the third stage—the tipping point. Women stop being “women directors” in the eyes of the company and finally become directors. The company achieves normalcy, a stage of gender parity.

Japan, according to Gopal, is somewhere between stages one and two. Stronger corporate governance in Japan would provide a major push for progress.

“I do not want Japan to fall behind,” says Gopal, “and I think the companies that are lagging are hurting themselves. Yes, there are challenges, but these challenges can absolutely be overcome with the right training and the right networks. There are solutions.”

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