On March 13^th, Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code under the Financial Services Agency finally announced draft revisions of the Japan’s Corporate Governance Code and draft Guidelines for Investors and Company Engagement after long discussions among the experts as well as taking up opinions in public from those who have been concerned on these issues since the commencement of the Council on August 7^th in 2015. The FSA now have opened public comment on the Revisions of JCGC to which we, ICGJ, will contribute our opinions. The FSA will close it on April 29^th with the hope of settling it all by June.

Acronyms:

Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code:  “Council”

The Financial Services Agency:  “FSA”

Japan’s Stewardship Code:  “JSC”

 Japan’s Corporate Governance Code:  “JCGC”

Draft revisions of JCGC:  “Revisions of JCGC”

Draft Guidelines for Investors and Company Engagement:  “Guidelines”

The purpose of the Council is to follow up with the prevalence and adoption of the JSC and the JCGC as well as further improving corporate governance of all listed companies. For this purpose, the Revisions of JCGC focus on issues which are supposed to be of particular current concern. The Guidelines are to be appendix both for the JSC and the JCGC in order to facilitate dialogue between companies and investors.

Unfortunately, English versions of these documents are not available yet. I will give you brief outlines of the Revisions of JCGC and the Guidelines.

The Revisions of JCGC focus on following issues.

1. Cross-Shareholdings

• Clear explanation of rationale for cross-shareholdings
• No obstruction by, for example, suggesting reduction in business with the cross-shareholder, against the cross-shareholder’s attempt to cancel cross-shareholdings.
• No irrational business with the cross-shareholders which may impair common interests of the company and the shareholders of the company.

2. Corporate responsibility to fulfill duties as an asset owner of corporate pension funds

• Listed companies should deliberately deploy qualified personnel for fund management so that companies fulfill duties as an asset owner of corporate pension funds, which include stewardship activities such as monitoring over fund management companies.

3. Roles and responsibilities of the board

• Succession plan for CEO.
• Design of remuneration scheme, which gives directors and CEO sound incentives for sustainable growth, in accordance with objective and transparent procedures.
• Disclosure of the above process.
• Nomination of CEO in accordance with objective, timely and transparent procedures.
• Dismissal of CEO based on evaluation of corporate performance in accordance with objective, timely and transparent procedures.
• Companies without statutory nomination and remuneration committees should take advices of independent directors regarding matters of CEO nomination/dismissal and remuneration by voluntarily setting up advisory nomination and remuneration committees.
• Diversification of the board in terms of gender and nationality.
• If necessary, sufficient number of independent directors on the board more than two or one-third of the directors.

The Guidelines

The Guidelines are to facilitate dialogue between companies and investors based on the JCGC and the JSC.

They focus following subjects, most of which overlap those of the Revisions of JCGC.

1. Business judgement responding to changes in business environment.

• Business strategies and plans. Are they consistent with corporate objectives?
• Is the cost of capital well identified? Is capital efficiency targeted and exceeds the cost of capital?
• Are changes in business environment and business risks identified? Are businesses daringly restructured to cope with those changes and risks?

2. Policies for investment strategies and corporate finance.
3. Nomination and dismissal of CEO.
4. Succession plan of CEO.
5. Remuneration scheme.
6. Diversification of the board in terms of gender and nationality. In particular, are female directors elected?
7. Roles of independent directors.
8. Qualification of Kansayaku and company’s supports for them.
9. Cross-shareholdings.
10. Responsibilities as an asset owner of corporate pension funds

It is our regret that the Revisions of JCGC do not mention on importance of internal audit at all. One of our opinions on the Revisions of JCGC is that they should clearly identify roles of internal audit and recommend listed companies to put internal audit in the chain of command of Kansayaku or audit committee. It would assure internal audit would be independent from CEO and other senior officers. We believe this is an imminent measure to be taken to prevent incessant corporate scandals caused by big names of Japanese companies.

We will announce overall comments on other important issues for the FAS’s public comments by April 29^th.

By Masatoshi Yasuda