Lawmakers in the world's two largest economies, the United States and Japan, have enacted legislation to require firms to at least consider altering their governance structure. In the United States, the 2002 Sarbanes-Oxley Act (SOX) and Securities and Exchange Commission (SEC) rules have led to revised governance structures at the 30 Dow Jones (DJ) companies. The governance changes affect the composition, size and functions of the board of directors and its relations with the chief executive officer (CEO). A 2003 change in the Japanese Commercial Code provided firms with three governance options, including a "Company with Committees" system similar to that found in U.S. firms. Japanese firms now have three governance options available and each, particularly the new "Company with Committees" system, is examined here along with the reasons why firms either change or decide not to do so. We endorse allowing firms to adopt different governance systems to accommodate special needs as well as country, corporate and cultural concerns. Greater use of independent directors and the separation of the CEO and Chairman roles by firms in both countries would enhance corporate governance.



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