japanJapanese companies have not always had set the standard for corporate governance, but a current initiative of the current governmental administration is trying to change that. As part of ongoing  efforts to try to revitalize the Japanese economy, an advisory committee to the country’s Financial Services Agency (FSA) has introduced a draft proposed corporate governance code that, when finalized, will apply to all companies listed on Japanese exchanges.



The current draft of the code, published in December 2014 and entitled “Japan’s Corporate Governance Code: Seeking Sustainable Corporate Growth and Increase Corporate Value over the Mid- to Long Term” (here), is presently in a public comment period. The final code is scheduled to take effect on July 1, 2015. A February 2015 memo from the Jones Day law firm entitled “Japanese Corporate Governance is Changing with the Adoption of a New Code in 2015” and describing the current draft of the code can be found here.


Japanese Prime Minister Shinzō Abe’s economic revitalization policies place a priority on the corporate governance of Japanese companies. As part of his administration’s revitalization strategy, a committee, known as the Council of Experts Concerning the Corporate Governance Code, was formed in June 2014 to propose a revised corporate governance code. The Council introduced the current draft for public comment in December 2014. The final version of the code will be announced in March 2015 and it will take effect on June 1, 2015.


The current draft identifies the objectives of the Code as follows:


It is important that companies operate and manage themselves with the full recognition of responsibilities to a range of stakeholders, starting with fiduciary responsibility to shareholders who have entrusted the management. The Code seeks “growth-oriented governance” by promoting timely and decisive decision-making based upon transparent and fair decision-making through the fulfillment of companies’ accountability in relation to responsibilities to shareholders and stakeholders. The Code does not place excessive emphasis on avoiding and limiting risk or the prevention of corporate scandals. Rather, its primary purpose is to stimulate healthy corporate entrepreneurship, support sustainable corporate growth and increase corporate value over the mid- to long-term.


Because the code aims to allow governance to be adapted to each company’s particular situation, the code takes a “principles-based approach” rather than a rules-based approach. The code is not legally binding, but it does take a “comply or explain” approach, pursuant to which companies must either comply with a principle or explain the reasons why it has not done so.


The current draft of the code provides five General Principles, each of which has several specific supplemental principles. The five General Principles are: Shareholder Rights and Equal Treatment of Shareholders; Proper Cooperation with Stakeholders; Proper Disclosure and Transparency; Responsibilities of the Board; and Shareholder Engagement.


General Principle 4 specifies that company board will fulfill their responsibilities in three ways: setting the broad direction of corporate strategy; establishing an environment where appropriate risk-taking by the senior management is supported; and carrying out effective oversight of directors and management from an independent and objective standpoint. The code also addresses the board’s role in the appointment and dismissal of management as well as with respect to executive compensation.


Interestingly, with respect to executive compensation, the Council of Experts expressed their concern that Japanese companies are too risk averse, and they suggest that the code should send a clear message about risk-taking in business operations and that executive compensation should provide proper incentives for healthy entrepreneurship. The Council urges boards to strike the proper balance of cash and equity compensation, and proposes that the compensation policy should be clearly disclosed.


In describing general principles regarding appropriate information disclosure and transparency, the draft proposes that companies should “strive to actively provide information beyond that required by the law,” including not only financial information, but also non-financial information “such as business strategies and business issues, risk and governance.” Because the information will serve as the basis for a dialogue with shareholders, the board should ensure that the disclosed information “particularly non-financial information, is accurate, clear and useful.”


Among other things, the draft code proposes “in order to enhance transparency and fairness in decision-making and ensure effective corporate governance” that companies should provide information about company objective; the company’s policies and procedures in determining remuneration of senior management and of the directors; and board policies and procedures for the appointment of senior management as well as for the nomination of directors.


The draft code contains a number of specific principles that are of particular interest. For example, Principle 2.4, entitled “Ensuring Diversity, Including Active Participation of Women,” states that “companies should recognize that the existence of diverse perspectives and values reflecting a variety of experiences, skills and characteristics is a strength that supports their sustainable growth. As such, companies should promote diversity of personnel, including the active participation of women.” This principle is particularly interesting in light of what the Economist recently called the “lowly status” of women in the Japanese workforce.


Principle 2.5 addresses the issue of corporate whistleblowing. The provision states that “companies should establish an appropriate framework for whistleblowing such that employees can report illegal or inappropriate behavior, disclosures or any other serious concerns without fear of suffering from disadvantageous treatment.”