Corporate governance reform in Japan: the second revision of the Stewardship Code

The Director of the Corporate Governance Reform at Japan's FSA explains recent changes on sustainability and ESG

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The Council of Experts on the Stewardship Code, for which the Financial Services Agency (FSA) serves as a secretariat, published the second revision of Japan’s Stewardship Code on March 24. The revised code aims to improve the quality of engagement between institutional investors and investee companies in order to further enhance the effectiveness of Japan’s corporate governance reform. In addition, the revised code takes into account recent trends in capital markets, such as sustainability issues and ESG factors.

In the following sections, we briefly look back at the role of the stewardship code in Japan’s corporate governance reform, provide an overview of the main points of the revised code and, lastly, describe the remaining challenges in the reform.

The stewardship code and Japan’s corporate governance reform

The second Abe cabinet, which started in 2012, released a growth strategy called “Abenomics”, in which corporate governance reform was identified as one of the most important challenges. Based on that, and mainly modelled on the approach to corporate governance issues in the UK, Japan’s stewardship code was established in 2014, and Japan’s corporate governance code in 2015. In order to follow up with reactions towards the two codes, as well as to further promote corporate governance reform, the Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code (the “Follow-up Council”) was launched in 2015. In response to discussions in the Follow-up Council, the stewardship code was revised in 2017, and the corporate governance code in 2018.

In the following sections, we briefly look back at the role of the stewardship code in Japan’s corporate governance reform, provide an overview of the main points of the revised code and, lastly, describe the remaining challenges in the reform.

The two codes require both institutional investors and listed companies to work properly in order to achieve high-quality corporate governance, with the aim of increasing corporate value and sustainable growth over the medium to long term, as well as securing investment returns for clients and beneficiaries over the medium to long term. In that sense, the two codes are expected to function as two wheels of a vehicle, such that the sustainable growth of companies will be promoted by both sides – investors and companies.

In response to the revision of the two codes, there has been certain progress made on corporate governance reform. For example, the percentage of listed companies to have appointed more than one independent director increased from 21.5% in 2014 to 93.4% in 2019 in the Tokyo Stock Exchange First Section. In addition, the number of signatories to the stewardship code has increased from 127 in May 2014 to 280 in March 2020. On the other hand, it was pointed out that the plans for corporate governance reform should be more effective and responsive to recent trends in capital markets. In light of these points, the stewardship code was further revised in March 2020.

What are the key changes in Japan’s latest Stewardship Code?

(1)  Sustainability including ESG factors

The revised code suggests that institutional investors should conduct their stewardship activities giving consideration to sustainability in a way that is consistent with their investment management strategies; as well as to clearly specify how they take sustainability issues into consideration in their respective stewardship policy.

The code also responds to a rapidly growing interest in sustainability among investors and companies in the current capital markets. For instance, the UK Stewardship Code 2020 defines stewardship as "stewardship that creates long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society", and explicitly requires the consideration of ESG factors in their investment decisions.

The revised code suggests that institutional investors should conduct their stewardship activities giving consideration to sustainability in a way that is consistent with their investment management strategies; as well as to clearly specify how they take sustainability issues into consideration in their respective stewardship policy.

However, being an essential part of Japan’s growth strategy, the ultimate objective of the code continues to be to increase corporate value and sustainable growth over the medium to long term. Also, the issues on sustainability are expected to be taken into account "consistent with their investment management strategies", which indicates that appropriate ESG initiatives are expected to be promoted in accordance with a variety of such strategies.

(2)  Application of the Code to Non-Equity Asset Classes

Japan’s stewardship code has been intended to apply to investments in Japanese listed shares. That being said, in response to a growing interest in sustainability, the revised code explicitly stipulates that it may apply to other asset classes to the extent that it contributes to fulfilling stewardship responsibilities. It is expected that the entire investment chain can be further activated by including investments in assets other than listed shares in the stewardship activities.

(3)  Disclosure of rationale for voting decisions.

The revised code instructs institutional investors to disclose the rationale for their voting decisions in relation to important agendas, such as those perceived to carry conflicts of interest or those that need to be explained in light of the investors’ voting policy.

While the disclosure of the rationale for voting decisions was also recommended in the previous code, the latest version further strengthens the level of disclosure required by making it subject to “comply or explain” rules for key matters.

(4)  New Principle and Guidance for Service Providers

In the newly-established Principle 8 and its guidance, the revised code instructs service providers for institutional investors, such as proxy advisors and investment consultants for pensions, to manage conflicts of interest effectively, develop structures for conflicts of interest management, and disclose relevant measures. The revised Ccde further instructs proxy advisors to, among other matters, exchange views with companies when providing proxy recommendations. It is also notable that the revised code encourages proxy advisors to provide the company with an opportunity to confirm whether the information based on the recommendation is accurate upon a request from the company.

Remaining issues

In April 2019, the Follow-up Council suggested continuing to discuss group-governance issues and how to ensure confidence in audits. In addition, the revised code recommends in its preamble that the relevant authorities – including the FSA and the Follow-up Council – further discuss issues raised during the second revision of the code. Based on those suggestions, FSA will continue to work on these issues in order to further advance Japan’s corporate governance reform.

Those issues include the following:

–       Whether, with the expansion of passive investment, it is necessary to review how to improve engagement; 

–       Whether, in order for proxy advisors to carry out initiatives in accordance with the Guidance 8-2 and 8-3, companies should disperse the timings of General Shareholders Meetings, disclose relevant materials earlier, and enhance disclosure, etc.; 

–       Whether, as internal audits are an essential function for ensuring effective corporate governance, institutional investors should cover the status of the development and utilisation of the internal audit division when monitoring the governance of investee companies;

–       Whether further efforts should be made to reduce cross-shareholdings; and

–       How to optimise the management of conflicts of interest in sponsor companies to further ensure effective stewardship activities of corporate pensions.


Osamu Hamada is Director of the Corporate Governance Reform, Corporate Accounting and Disclosure Division of the FSA’s Policy and Markets Bureau