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Japanese corporate governance moves more in line with western countries

July 2015

The views of shareholders have never ranked high in the concerns of Japan’s corporate management. They are rewarded by long-term capital appreciation in the value of their stocks and expected wait quietly for that to occur. Transparency, accountability are not on any agenda.

Now a new code requires Japanese companies to appoint at least two independent directors to their board. These firms will also have to talk about executive succession plans and procedures for remuneration – something that has never happened in Japan before.

The governance code, which came into effect on June 1, is the latest in a raft of changes. The government introduced a stewardship code last year – calling on investors to seek greater dialogue with Japanese firms in which they are invested – and has also amended the Company Act.

This is the first time any Japanese government has laid down detailed rules on how firms should conduct their affairs.
In future, the details of all that’s required by the corporate governance code will normally be published right after the AGM. But because so much change is taking place in a short time – and such so many independent directors must be found – the Tokyo Stock Exchange has allowed companies to either comply or explain why they haven’t done so by the end of the year.

Japanese firms fall into two schools. Leading multinational Japanese companies with operations spanning many countries, particularly the USA, are generally aware of what’s required by foreign investors in terms of corporate governance. A second, larger group of companies, are usually domestic, very often much smaller, and quite possibly run by the founder’s family. These are comfortable with the existing system and see little need for greater transparency, accountability, or engagement with investors.

The Tokyo Stock Exchange is seeking to shame the laggards into action, with a new index of well-behaved firms. The reforms have captured the public mood: books with titles like “Changing Japan, the Poorest Nation for Return-on-Equity” grace the shelves of booksellers.

The pressure for change comes directly from Japan’s Prime Minister, Shinzaro Abe. He reckons that getting companies to change their traditional ways is a key element of his grand plan to restore vigour to the Japanese economy.

The corporate reforms, along with monetary easing by the Bank of Japan, are the most tangible elements so far of the prime minister’s programme. 


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Asia | Governance

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