When launching a business in Japan, the most widely used corporate form is the Kabushiki-Kaisha. That said, not every Kabushiki-Kaisha should adopt the same governance structure. What works for a newly established, small company with a limited shareholder base can be very different from what is required for a high-growth company preparing for an IPO, or for a large-scale company.

Governance design is not merely a matter of formality. It directly affects decision-making speed, relationships with parent companies and investors, internal control frameworks, and future funding and IPO readiness.

This article explains how to consider governance design for a Kabushiki-Kaisha, taking into account the company’s stage of growth and practical business needs.

１．The “Minimum Model” Commonly Used by Small Companies

For early-stage startups and small companies with a limited number of shareholders, a common approach is a simple structure with no board of directors, and only one director or a small number of directors. Especially where the founder owns 100% of the shares and manages the business as a director, this minimum model is often the most workable in practice.

The key advantage of this model is speed. There is no procedural burden such as convening board meetings or preparing board minutes, and, so long as the company does not violate applicable laws or its articles of incorporation, the owner-manager can make decisions quickly. In the early stage of a business, significant decisions arise continuously (cash flow management, hiring, commencing transactions, selecting contractors, etc.), and this agility can be a major benefit.

In addition, in a company without a board of directors, the shareholders’ meeting can resolve a wide range of matters concerning the company unless laws or the articles of incorporation provide otherwise. For an owner-managed company, this can translate into substantial practical flexibility.

However, this structure is not a universal solution. It tends to function well while the shareholders and management are essentially the same. Once third-party investors are introduced, or when interests may diverge among co-founders, the allocation of authority can become unclear. For example, relying solely on the statutory governance structure may be insufficient to clarify who may execute contracts without others’ approval, or who must approve expenditures or borrowings above a certain threshold.

As a result, even when a company does not establish a board of directors, it is common in practice to supplement the governance framework through the articles of incorporation, shareholders’ agreements, and internal approval rules. Even if the statutory governance structure is simplified, it remains important to design governance as a whole, including internal rules.

２．The “Board of Directors + Representative Director” Model Commonly Used by Foreign-Owned Companies

For Japanese subsidiaries of foreign companies, or companies involving multiple shareholders, it is not uncommon to choose a structure with a board of directors. This is often because the company needs a clearer governance and approval process.

A company that establishes a board of directors is designed to provide an organized check within the decision-making process for business execution. To form a board of directors, at least three directors are required (Companies Act, Article 331, paragraph 5). In addition, under the Companies Act, if a company establishes a board of directors, it must, subject to some exceptional cases, also appoint a company auditor as a check against excessive managerial discretion (Companies Act, Article 327, paragraph 2). This results in stronger governance, but it also means that the company must generally secure at least four individuals: three directors plus one company auditor. In practice, securing these personnel can itself be a hurdle.

３．Governance Bodies Required When the Company Becomes Large

As a company grows and qualifies as a Large Company (Daigaisha)—i.e., a company with capital of JPY 500 million or more or total liabilities of JPY 20 billion or more—a more stringent governance structure becomes legally required (Companies Act, Article 2, item 6). Specifically, all Large Companies (Daigaisha) must appoint an Accounting Auditor (Kaikei-Kansa-nin) as an external audit framework conducted by certified public accountants or an audit firm (Companies Act, Article 328, paragraphs 1 and 2).

Further, where the company is both a Large Company (Daigaisha) and a Public Company (Koukai-Kaisha)—i.e., a company without restrictions on the transfer of shares—it must also establish a Board of Company Auditors (Kansayaku-kai) consisting of three or more company auditors (Companies Act, Article 328, paragraph 1).

In practice, it is common to focus solely on capital requirements and overlook the fact that the ‘Large Company’ (Daigaisha) criteria also apply to total liabilities. For instance, a company may inadvertently meet the JPY 20 billion liability threshold due to financing for capital expenditures. During growth phases, it is essential to periodically review governance structures and consult with professionals as needed.

４．Conclusion

There is no single “correct” governance structure for a Kabushiki-Kaisha. Should the company prioritize agility, or transparency and robustness of governance? By assessing the company’s growth stage and stakeholder profile, and flexibly updating the company’s institutional “framework,” management can build a solid foundation for sustainable business growth.

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