Japan’s Corporate Governance Code Revised in Anticipation of “Prime Market” Segment Coming to TSE

“It won’t be easy for each of more than 3,700 listed companies in Japan to comply with the entirety of the Code,” says Kazutaka Kuroda, Senior ESG Strategist at Mitsubishi UFJ Morgan Stanley Securities. “Therefore, the basic stance is a principles-based approach: Comply where you can, and where you cannot, explain why you can’t or don’t need to comply.”

Before the Code revision, Japanese companies often gave vague responses when asked about their compliance, Kuroda says. “Some companies gave a cursory explanation saying, ‘Let's just say we are implementing all the basic principles. If a shareholder asks for a detailed explanation, say I'm sorry.’ The latest revision makes it difficult to be vague about one’s compliance,” says Kuroda, noting that companies will now be forced either to comply or explain why they don’t.

The COVID-19 pandemic brought increased attention to the importance of environmental, social and governance factors (ESG). While the original Code of 2015 referenced sustainability (in Section 2, “Appropriate Cooperation with Stakeholders Other Than Shareholders,” General Principle), Kuroda points out, he says the revision takes “a big step forward” by elaborating on the definition of sustainability:

To effectively promote sustainability and diversity, a board of directors must obviously be able to fulfill its functions. As Kuroda observes, “personally, I think the most important thing in this revision is that the roles and responsibilities of the board of directors are also specifically stated in Supplementary Principle 4.2.2: ‘The board should develop a basic policy for the company's sustainability initiatives…’ In short, members of the board of directors are now required to possess a baseline understanding of sustainability.”

Kuroda also applauds the revisions requiring the addition and disclosure of a board member skills matrix. The idea is to identify the knowledge, experience, and abilities that directors should possess – and to disclose how each director stacks up. “What are the requirements for directors and do those serving on the board meet them?” asks Kuroda. “Particularly, when the number of outside directors increases, the skills of individual directors will be diligently scrutinized. The skills matrix will make it easy to see if the requirements are being met,” he says.

https://www.institutionalinvestor.com/article/b1spy621t219ny/japan-s-corporate-governance-code-revised-in-anticipation-of-prime-market-segment-coming-to-tse