The Justice Ministry, confronted with fierce opposition from the business community, has scrapped plans to make it mandatory for companies to appoint outside directors.
The ministry had wanted to enforce the practice as a means of preventing wrongdoing and enhancing transparency in corporate management.
It will formally announce its decision at a meeting of the Legislative Council, an advisory panel to the justice minister, on July 18.
The government and the ruling Democratic Party of Japan have been discussing the legal revision since last year following two huge corporate scandals.
One involved Olympus Corp., which concealed massive losses for years. In the other case, the former chairman of Daio Paper Corp. was arrested for borrowing heavily from subsidiaries to fund his gambling addiction.
The proposed revision to the Company Law was aimed at strengthening surveillance of corporate management by third parties, which have no constraints.
However, business circles were strongly opposed on grounds that powerful outside directors could limit the authority of management.
Keidanren (Japan Business Federation), the nation's largest business organization, said in an opinion submitted to the Legislative Council: "Surveillance of corporate management has been fully pursued by the board of directors and the board of auditors."
In December, the Legislative Council released an interim draft of possible changes to the Company Law.
Recommendations in the interim draft included a requirement that all "large companies"--including listed companies capitalized at 500 million yen ($6.3 million) or more--have at least one outside director.
Viewing it as the main plank of strengthened corporate governance in Japan, the government had planned to submit an amendment bill, possibly as early as this autumn, to the extraordinary Diet session.
Instead of giving up mandatory outside directors under the Company Law, the DPJ and the Justice Ministry are now considering introducing the system gradually through measures such as incorporating the requirement into the Tokyo Stock Exchange's listing rules.
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