Evolution of Japan’s Corporate Governance Code
AUTHOR
FURUSAWA Tomoyuki
Director-General of the Policy and Markets Bureau
Japan Financial Services Agency (FSA Japan)
Corporate Governance reform became a key issue under Prime Minister Abe’s initiative in 2012. The key structure of the reform is the tandem of Stewardship Code and Corporate Governance Code.
In 2014, we first formulated Japan’s Stewardship Code, which is a set of principles for institutional investors. This Code requires institutional investors to hold constructive dialogues with companies. It also requires institutional investors to promote the sustainable growth of investee companies from a mid- to long-term perspective. Then, in the following year, 2015, we formulated our first CorporateGovernance Code, which is a set of principles for listed companies. Since then, we have constantly followed up on the corporate governance of Japanese companies. Based on our follow-up, we revised the Corporate Governance Code in 2018. This was our first revision of the Code.
So you can see that Corporate Governance in Japan has developed at a rapid pace. Compared to, for example, the UK, where the Code of Best Practice was published nearly 30 years ago, in 1992, we have only 7 years of history.
This year marks the second revision of our Corporate Governance Code. From October last year to March this year, the council of experts on the Corporate Governance Code thoroughly examined and discussed what kind of corporate governance would be best to allow the Board to effectively supervise companies.
Based on these discussions, a draft of the newly revised Corporate Governance Code was agreed on. We started asking for public comments on the revised draft on April 7. So far, we have received a lot of feedback from both inside and outside Japan. Based on this, we plan to finalize the draft in June.
In order to grow under the severe economic and social impact triggered by the Covid-19 pandemic, all companies must recognize their challenges, develop a strategy to meet these challenges, and execute their strategy. For this, the role of dialogues between investors and companies has become even more critical.
Based on this thinking, we have three main points in our Revision, which are:
“Enhancing board independence,” “promoting diversity,” and “sustainability and ESG.”
1. Enhancing board independence
Under dramatic changes in the business environment, the board is required to support and effectively oversee management’s prompt and decisive risk-taking in making important decisions.
In doing this, independent directors are expected to play a pivotal role on the board. To this end, we urge companies listed on the Prime Market, which will be the market for companies with large market capitalization, high liquidity and higher governance “to consider appointing at least one-third of their board members as independent directors and, if appropriate, appointing a majority of board members as independent members.”
We need to focus not only on quantity, but also on quality, so we have included measures to improve the quality of board members. For example, listed companies will be required to identify the skills that the board needs in light of their business strategies, and then disclose the combination of skills that each inside and outside director possesses. This is known as a “skills matrix.” In particular, we consider that management experience in other companies is an essential skill; therefore, we have strongly encouraged independent directors with such qualification to be included on the Board.
2. Promoting diversity
In order to meet the challenges under the post-COVID economy, it is essential for companies to have diverse perspectives and values based on various experiences, abilities and characteristics. For this reason, each company will be required to disclose a policy and voluntary measurable targets for ensuring diversity in top corporate management, such as promoting women, non-Japanese and mid-career professionals to such positions. I hope that these policies will further enhance diversity in Japanese companies.
3. Sustainability and ESG
With the aim of increasing corporate value over the mid- to long-term, it is becoming increasingly important to positively and proactively address factors related to sustainability. Therefore, the Board needs to develop a basic policy and disclose initiatives on the company’s sustainability aligned with their corporate value. Also, from the perspective of promoting constructive engagement on sustainability between investors and companies, it is essential to provide information on sustainability in a comparable and consistent manner. Therefore, on the Prime Market, companies will be required to enhance the quality and quantity of their disclosure based on the TCFD recommendations, or equivalent international frameworks. When the IFRS Foundation, the body that sets International Financial Reporting Standards, develops a unified disclosure framework for sustainability disclosure based on the TCFD recommendations, the framework will be deemed as “an equivalent framework.” Japan will fully support their efforts to develop internationally comparable and consistent sustainability disclosures. And we will continue to make efforts to ensure that companies disclose sustainability information in a substantial and effective manner, not just formally.
As described above, Corporate Governance in Japan developed at a rapid pace, so we take great care in ensuring that our measures are implemented in a substantial manner, and avoiding the so-called “form over substance” problem. This is because when we rush to implement measures, there is always a danger of achieving only formal compliance that actually lacks substance.
Published 2021