Navigating Japanese Non-Profit Governance: What are the Mandatory Organs and Officer Roles in a Social Welfare Corporation?

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

Following our introduction to Social Welfare Corporations (Shakai Fukushi Hojin, or SWFs) in Japan, this article delves into their internal governance structures. The Social Welfare Act (Shakai Fukushi Hō), particularly after significant amendments effective April 1, 2017, mandates a specific framework of organs and officer roles. This framework is designed to ensure transparency, accountability, and the effective pursuit of their social welfare objectives. Understanding these roles and their interplay is essential for anyone engaging with or analyzing these unique Japanese non-profit entities.

I. The Foundation of Governance: Mandatory Organs Overview

The Social Welfare Act, in Article 36, stipulates that Social Welfare Corporations must establish several key organs: Councillors (Hyōgiin), a Councillor Council (Hyōgiinkai), Directors (Riji), a Board of Directors (Rijikai), and Auditors (Kanji).

Beyond these, an SWF may, by its Articles of Incorporation (Teikan), choose to appoint an Accounting Auditor (Kaikei Kansanin). However, this role becomes mandatory for "Specified Social Welfare Corporations" (Tokutei Shakai Fukushi Hojin). These are defined as SWFs whose revenue in their most recent fiscal year exceeded 3 billion yen, or whose liabilities at the end of that year were over 6 billion yen. For such entities, the appointment of an Accounting Auditor became a requirement from the conclusion of the first regular Councillor Council meeting convened after the 2017 Amended Act's relevant provisions took effect.

The 2017 reforms emphasized the strengthening of these governance mechanisms to enhance public trust and ensure that SWFs operate with a high degree of integrity and responsiveness to societal needs.

II. The Councillors (Hyōgiin) and the Councillor Council (Hyōgiinkai): The Supervisory Layer

The introduction of a mandatory Councillor and Councillor Council system for all SWFs was a cornerstone of the 2017 reforms, aimed at providing a robust supervisory layer distinct from the executive functions.

A. Role and Nature of Councillors

Councillors are defined as individuals possessing the "necessary knowledge and insight for the proper operation of a social welfare corporation" (Social Welfare Act, Article 39). Their primary role is to form the Councillor Council, which serves as a key decision-making and oversight body, particularly concerning the appointment and dismissal of Directors and Auditors, and amendments to the Articles of Incorporation.

B. Selection and Qualification of Councillors

The selection method for Councillors must be stipulated in the SWF's Articles of Incorporation (Article 39). There are stringent disqualification criteria (Kekkaku Jiyū) outlined in Article 40, Paragraph 1 of the Act. These include:

  • A corporation itself cannot be a councillor.
  • Persons declared as adult wards or persons under curatorship.
  • Individuals convicted of violating certain welfare-related laws (e.g., Public Assistance Act, Child Welfare Act, Elderly Welfare Act, Act on Welfare of Physically Disabled Persons, or the Social Welfare Act itself) until their sentence is completed or they are no longer subject to its execution.
  • Those sentenced to imprisonment without work or a more severe penalty, until the sentence is completed or they are no longer subject to its execution.
  • Officers of an SWF at the time a dissolution order was issued by the supervisory authority under Article 56, Paragraph 8.

Crucially, a Councillor cannot concurrently serve as a Director, Auditor, or an employee of the same SWF (Article 40, Paragraph 2). This separation is vital for maintaining the Councillors' independent oversight function.

Furthermore, strict related-party restrictions apply (Article 40, Paragraphs 4 and 5; Social Welfare Act Enforcement Rule Articles 2-7, 2-8). These rules are designed to prevent any single individual, their family, or associated entities from dominating the Councillor Council. For example, the spouse or relatives within three degrees of consanguinity of any given Councillor or Officer, or other specially defined related persons, cannot be included on the Councillor Council in a way that violates these rules.

C. Number and Term of Councillors

The number of Councillors must exceed the number of Directors stipulated in the Articles of Incorporation (Article 40, Paragraph 3). Since the minimum number of Directors is six (see below), this generally means a minimum of seven Councillors.
However, a transitional measure was put in place for smaller existing SWFs (defined as those whose ordinary revenue for the fiscal year starting between April 1, 2015, and March 31, 2016, did not exceed 400 million yen, as per Article 4 of the Order for the Enforcement of the Act for Partial Revision of the Social Welfare Act, etc.). These smaller SWFs could operate with four or more Councillors for a period of three years from the enforcement of the Amended Act (Supplementary Provisions of the Amended Act, Article 10).

The term of office for a Councillor is, in principle, until the conclusion of the regular Councillor Council meeting concerning the last fiscal year ending within four years after their appointment. However, the Articles of Incorporation can extend this period up to six years (Article 41, Paragraph 1). The Articles of Incorporation may also stipulate that the term of a Councillor elected to fill a vacancy shall be the remainder of the predecessor's term (Article 41, Paragraph 2).

For SWFs existing at the time of the 2017 reforms, new Councillors had to be appointed in accordance with their revised Articles of Incorporation before the April 1, 2017, effective date. The terms of any Councillors under the pre-reform system expired on March 31, 2017 (Supplementary Provisions of the Amended Act, Article 9, Paragraphs 1 and 3).

D. Vacancies Among Councillors

If the number of Councillors falls below the stipulated number, a Councillor who has resigned or whose term has expired continues to hold their rights and duties until a newly elected Councillor assumes office (Article 42, Paragraph 1). In situations where a vacancy might impede the SWF's operations, the supervisory authority (Shokatsu-cho) has the power to appoint a temporary Councillor upon request from interested parties or on its own initiative (Article 42, Paragraph 2).

E. The Councillor Council (Hyōgiinkai)

The Councillor Council, composed of all Councillors, is a supreme decision-making body. Its powers include the appointment and dismissal of Directors and Auditors, approval of their remuneration, approval of financial statements, changes to the Articles of Incorporation, and decisions on fundamental matters like the disposal of essential assets or dissolution. The operational details of Councillor Council meetings will be discussed in a subsequent article.

III. The Officers (Yakuin): Directors (Riji) and Auditors (Kanji) – The Executive and Auditing Layer

"Officers" (Yakuin) in an SWF encompass both Directors and Auditors. They are entrusted with the execution of the SWF's business and the auditing of its operations, respectively.

A. Selection of Officers

Directors and Auditors are appointed by a resolution of the Councillor Council (Article 43, Paragraph 1). This provision became applicable to officer selections made after the 2017 Amended Act's effective date (Supplementary Provisions of the Amended Act, Article 11). The Councillor Council can also resolve to appoint substitute (alternate) officers to fill potential vacancies, with specific matters to be determined at the time of such resolution (Article 43, Paragraph 2; Social Welfare Act Enforcement Rule Article 2-9, Paragraph 2).

B. General Disqualification Criteria for Officers

The disqualification criteria for becoming an Officer are largely the same as those for Councillors, as stipulated in Article 44, Paragraph 1, which references Article 40, Paragraph 1.

C. Directors (Riji)

  • Number: An SWF must have at least six Directors (Article 44, Paragraph 3). For SWFs existing before the reforms, this minimum number applied from the conclusion of their first regular Councillor Council meeting held after the 2017 amendments took effect (Supplementary Provisions of the Amended Act, Article 12).
  • Specific Requirements/Composition: The group of Directors must include (Article 44, Paragraph 4):
    1. Individuals with knowledge and insight concerning the management of social welfare services.
    2. Individuals familiar with the actual conditions of welfare in the SWF's operational area.
    3. If the SWF operates facilities, the manager of such a facility.
  • Related-Party Restrictions: Similar to Councillors, strict rules prevent an over-concentration of related individuals on the Board of Directors (Article 44, Paragraph 6; Social Welfare Act Enforcement Rule Article 2-10). For instance, the number of Directors who are spouses or relatives within three degrees of consanguinity to another Director, or who fall under other special relationships defined by ministerial ordinance, must not exceed three persons. Additionally, such related Directors, including the Director themselves, their spouse, and relatives within three degrees of consanguinity, etc., must not constitute more than one-third of the total number of Directors.

D. Auditors (Kanji)

  • Number: An SWF must have at least two Auditors (Article 44, Paragraph 3).
  • Restrictions: An Auditor cannot concurrently serve as a Director or an employee of the SWF (Article 44, Paragraph 2). This reinforces their independence in auditing the Directors' performance.
  • Specific Requirements/Composition: The group of Auditors must include (Article 44, Paragraph 5):
    1. Individuals with knowledge and insight concerning social welfare services.
    2. Individuals with knowledge and insight concerning financial management.
  • Related-Party Restrictions: Auditors must not include individuals who are spouses or relatives within three degrees of consanguinity of any Officer, or other specially defined related persons (Article 44, Paragraph 7; Social Welfare Act Enforcement Rule Article 2-11).

E. Term of Office for Officers

The term of office for Directors and Auditors is until the conclusion of the regular Councillor Council meeting concerning the last fiscal year ending within two years after their appointment (Article 45). The Articles of Incorporation may, however, shorten this term. For SWFs existing at the time of the reforms, the terms of their then-current officers expired at the conclusion of the first regular Councillor Council meeting convened after the reforms took effect (Supplementary Provisions of the Amended Act, Article 14). New officers compliant with the amended law were then elected at this meeting.

F. Dismissal of Officers

Officers can be dismissed by a resolution of the Councillor Council if they breach their duties, neglect their tasks, or are unable to perform their duties due to mental or physical issues (Article 45-4, Paragraph 1). The dismissal of an Auditor, however, requires a special resolution of the Councillor Council, typically needing a two-thirds majority of Councillors eligible to vote (or a higher ratio if stipulated in the Teikan) (Article 45-9, Paragraph 7, Item 1).

G. Vacancies and Continuation of Duties for Officers

If an Officer's position becomes vacant, or the number of Officers falls below the Teikan-stipulated number, an Officer who has resigned or whose term has expired must continue to perform their duties until a newly elected Officer assumes office (Article 45-6, Paragraph 1). The supervisory authority can also appoint a temporary Officer if deemed necessary due to a vacancy that could disrupt operations (Article 45-6, Paragraph 2). If the number of Directors or Auditors falls below one-third of the number specified in the Teikan, the vacancy must be filled without delay (Article 45-7).

IV. The President (Rijichō): The Chief Executive Officer

The President (often translated as Chairperson or President of the Board of Directors) holds a pivotal role as the chief executive and representative of the SWF.

A. Selection and Status

The President is selected by the Board of Directors from among its members (Article 45-13, Paragraph 3). Alternatively, the Articles of Incorporation may stipulate that the President is selected by the Councillor Council (Article 45-8, Paragraph 2).
A significant change introduced by the reforms was the consolidation of representative authority solely in the President. Previously, other Directors could hold representative powers. For existing SWFs, the representative authority of pre-reform Directors continued until a President selected under the new system took office (Supplementary Provisions of the Amended Act, Article 15).

B. Representative Authority

The President has the authority to perform all judicial and extra-judicial acts concerning the business of the Social Welfare Corporation (Article 45-17, Paragraph 1). Any restrictions placed on the President's representative authority cannot be asserted against a bona fide third party (Article 45-17, Paragraph 2).

C. Dismissal and Vacancies

The President can be dismissed by the Board of Directors (or the Councillor Council, if the Teikan so provides for selection/dismissal). If the President's position becomes vacant, the provisions concerning an Officer continuing their duties (Article 45-6, referenced by Article 45-17, Paragraph 3) apply until a successor is appointed.

V. The Board of Directors (Rijikai): Collective Management

The Board of Directors is composed of all Directors and is responsible for (Article 45-13):

  1. Making decisions on the execution of the SWF's business.
  2. Supervising the execution of duties by the Directors.
  3. Selecting and dismissing the President.

The Board cannot delegate decisions on important business execution matters to individual Directors. The operational aspects of Board meetings will be explored in a subsequent article.

VI. The Accounting Auditor (Kaikei Kansanin): Specialized Financial Oversight

The role of the Accounting Auditor provides an additional layer of financial scrutiny, particularly for larger SWFs.

A. Appointment and Status

As mentioned, an Accounting Auditor is optional unless the SWF meets the criteria for a "Specified Social Welfare Corporation". If appointed, they are selected by a resolution of the Councillor Council (Article 43, Paragraph 1).

B. Qualifications

An Accounting Auditor must be a Certified Public Accountant (this includes foreign CPAs registered in Japan) or an audit firm (Article 45-2, Paragraph 1). They must also be legally qualified to audit financial statements under the Certified Public Accountant Act (Article 45-2, Paragraph 3).

C. Term of Office

The term of an Accounting Auditor is until the conclusion of the regular Councillor Council meeting for the fiscal year ending within one year after their appointment. They are deemed reappointed at that meeting unless a resolution to the contrary is passed. However, if an SWF amends its Articles of Incorporation to abolish the position of Accounting Auditor, the incumbent's term ends when that amendment takes effect (Article 45-3).

D. Vacancies

If the position of Accounting Auditor becomes vacant, or if the number falls below that stipulated in the Teikan, and a new Accounting Auditor is not promptly elected, the Auditors (Kanji) must appoint a temporary Accounting Auditor to fulfill the duties (Article 45-6, Paragraph 3).

Conclusion

The governance structure of Japanese Social Welfare Corporations, significantly reinforced by the 2017 legal reforms, establishes a multi-layered system of oversight and executive management. From the supervisory role of the Councillors and their Council to the executive functions of the Directors and the President, and the auditing roles of Auditors and Accounting Auditors, each element is designed to promote accountability, transparency, and the effective delivery of vital social welfare services. A clear grasp of these mandatory organs and officer roles is fundamental for any entity seeking to understand, partner with, or operate within Japan's extensive social welfare sector. The next article in this series will explore how these organs, specifically the Councillor Council and Board of Directors, conduct their meetings and make critical decisions.