A revised Code is setting higher standards for corporate governance in Japan.
EFFECTIVE: June 2021
- The fundamental principles for effective corporate governance in Japan have been revised.
- The Tokyo Stock Exchange (TSE) and Financial Services Agency Code updated the Corporate Governance Code in June and timed with a market restructuring scheduled for April 2022.
- Training, codes of conduct, a focus on culture and ethics, and board oversight are all reinforced in the Code as critical elements of seeking sustainable corporate growth and increased corporate value over the mid-to-long term in Japan.
- Revisions in the Code are designed to promote sustainability and diversity and to improve the function of boards of directors.
- Pundits have said the revisions in the Code don’t go far enough to meet international standards and the voluntary nature of the Code could limit real and lasting impact.
3-minute deeper dive
The Tokyo Stock Exchange (TSE) and Financial Services Agency revised its Corporate Governance Code, creating higher standards for companies seeking sustainable corporate growth and increased corporate value over the mid-to-long term. Japan’s Corporate Governance Code sets forth established principles for effective corporate governance. It is designed—when appropriately implemented—to contribute to the development and success of companies, investors, and the Japanese economy as a whole.
In the Code, corporate governance is defined as the structure for transparent, fair, timely, and decisive decision-making by companies—with due attention to the needs and perspectives of shareholders and also customers, employees, and local communities. This latest revision follows its introduction in 2015 (updated in 2018) and is connected to the Japan Revitalization Strategy, which outlined several initiatives to accelerate corporate governance systems and stewardship.
The Code established five fundamental principles for companies and provided a framework for achieving stronger performance over the long term and becoming more competitive globally.
- Securing the rights and equal treatment of shareholders, which includes developing an environment in which shareholders can exercise their rights appropriately and effectively.
- Appropriate cooperation with stakeholders other than shareholders, which includes the board and management establishing a corporate culture where the rights and positions of stakeholders are respected and sound business ethics are ensured.
- Ensuring appropriate information disclosure and transparency.
- Responsibilities of the board, which includes oversight of the corporate environment, internal controls, and “defensive functions,” while also setting business principles and ensuring proper board training.
- Dialogue with shareholders.
This latest revision is intended to extend these benefits to organizations and is timed TSE’s restructuring of Japan’s market segments in April 2022, which includes the creation of a “prime” segment for the biggest and best-governed stocks. Among the revisions in the Code:
- Enhancing board independence. To align with global best practices for independent directors and ensure a fair distribution of power—including requiring that prime market-listed companies have at least one-third of the board be independent and establishing new committees and practices on board nomination, remuneration, and diversity of skills.
- Promoting diversity. To provide greater operational efficiencies and to align with global expectations, including new disclosure requirements on the appointments of women, non-Japanese, and mid-career professionals; and transparency into human resources policies and status of implementations.
- Attention to sustainability and environmental, social, and governance (ESG). To create policy and disclosure initiatives on the company's sustainability and enhance the quality and quantity of climate-related disclosure aligned with international frameworks.
The revisions reinforce previous guidance that includes the need to establish business principles as the foundation of corporate value creation. It also underscores that the availability and effectiveness of codes of conduct for employees is essential to express values and carry out sound and ethical business practices. This includes a focus on the substantive assessment of whether the company’s corporate culture truly embraces the intent and spirit of the code of conduct—and not solely on the form of implementation and compliance. It also includes an appropriate framework for whistleblowing and objective assessments as well as responses to reported issues. The board should be responsible for both establishing the framework and ensuring and monitoring its enforcement, according to the Code.
The Code adopts a principled approach to corporate governance and a “comply or explain” method of enforcement, meaning a company must disclose its compliance or explain why it is not in compliance. Though voluntary, companies are now scrambling to comply with the Code revisions, as compliance is a minimum standard for organizations to be listed in TSE’s new prime market segment.
The revisions in the Code are groundbreaking for Japan and have gone further than ever in establishing new requirements for operating effectively, sustainably, and with full landscape of stakeholders’ needs at the center. But critics have said the revisions don’t go far enough to have real impact, nor do they meet global standards of good governance.
Fears include the Code revisions forcing a “check the box” mentality that has plagued other organizations. Others worry the requirements may mask deep and lasting change with such an intensive focus on quantity—how many board members or disclosures—versus the quality of operations and mindsets of management that ultimately direct and oversee decision-making and strategies for value creation.
While some companies are working hard to achieve alignment with the revisions to the Code, others may choose to delist rather than meet more stringent and specific requirements. Regardless of individual company actions, Japan’s move is aligned with a growing recognition globally that corporate governance is key to sustainability and growth—and must be rethought amid a global pandemic and seismic changes in business, society, and the geopolitical sphere.
About the Author
Ty Francis MBE, CCEP, DBus (Hon) is an award winning Welsh-American business development executive and corporate governance innovator, with extensive experience in ethics, compliance and values based programs. Ty is LRN's Chief Advisory Officer and part of the LRN Executive Team, where he works to amplify and deliver the company’s worldwide Ethics & Compliance advisory consulting business and corporate governance community outreach strategy.More Content by Ty Francis MBE, CCEP | Chief Advisory Officer