Published and draft legislation - Japan

Code of corporate governance in line with international practices

Japanes Code of Corporate Governance, 5th March 2015

The Japanese Code of Good Governance is part of the Japanese Revitalisation Strategy. It began with a committee of experts in August 2014, tasked with drawing up a code of corporate governance for the country based on OECD principles. It is applicable to all companies trading on the primary Japanese market.

The Tokyo Securities Exchange and the Financial Services Agency both sat on the committee and worked together to prepare the final draft of Japan’s first such code. It was finally published on 5th March 2015.

The fundamental objectives of the code are:

  • Generate systems of corporate governance oriented towards the growth of its companies, encouraging them to act in a transparent fashion, complying with their accountability obligations stemming from their responsibility towards shareholders and other stake holders.
  • Support companies’ sustainable growth and increase their medium-term and long-term value.
  • Stimulate an environment propitious to business initiative in which the powers of the companies’ administration and management bodies are reinforced.
  • Encourage medium-term and long-term investment.

The code contains 5 general principles (protection of rights and equitable treatment of all shareholders, cooperation with stakeholders, publication and transparency of information, powers of the board of directors and engagement with shareholders), which are enforced through the supplementary principles that follow. Their application will depend on the individual status of each institution.

Both the Japanese code and the code published by the CNMV in Spain in February this year, are non-binding. They have several other aspects in common:

  1. Comply or explain principle: if the institution does not comply with its principles it must explain why in its annual report on corporate governance or equivalent.
  2. Protection of shareholders’ rights and equitative treatment, with special emphasis on minority shareholders: right to attend and participate in general meetings, right to information, right to require inclusion of their items on the agenda, etc.
  3. Encouragement of engagement with shareholders: defining and promoting public communication policies and contact with shareholders.
  4. Transparency of information: dissemination and disclosure of financial and non-financial information on the corporate websites (corporate strategy, guidelines of corporate governance guidelines, policy for appointments and remuneration of directors and senior management, etc). This disclosure must be timely and easy for shareholders to access.
  5. Board powers: approval of the corporate strategy, fostering an appropriate environment for reasonable risk taking, effective supervision of the management and senior management, ratio of independent directors (in Spain the minimum number is 2 independent directors, whereas in Japan it is one), training for directors, management of conflicts of interest, supervision of procedures for appointing and remunerating directors and senior management, establishment of efficacious systems of risk management and internal control, etc. The final aim of all these powers is to enable the board better to promote the corporate interest.
  6. Diversity in the composition of the board, and active engagement of female directors.
  7. Constitution of board committees (for appointment and remuneration matters), comprising independent directors.
  8. Promotion of sustainability, social inclusion and protection of the environment, as part of the institution’s social corporate responsibility. The code also regulates new areas such as the possibilities of online voting at general meetings, the inclusion of measures to prevent hostile takeovers and the protection of stakeholders’ specific interests (creditors, employees, customers, trading partners, etc) by establishing channels for whistleblowers, and the publication and periodic review of a code of conduct for employees.

The document, along with Japan’s Stewardship Code, (published by the Japanese Financial Services Agency in February 2014 and setting out the principles of responsible institutional investment) is intended to achieve an effective system of corporate governance in Japanese companies, bringing them into line with best practices elsewhere in the world. It is expected to come into force on 1st June 2015.