Japan to consider governance reforms for public company boards

Japanese listed companies may soon be required to undertake enhancements to their corporate governance practices based on new proposals discussed in a recent meeting of an influential regulatory advisory body.

The Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code, which is jointly managed by markets regulator the Financial Services Agency (FSA) and the Tokyo Stock Exchange (TSE), met early this week to deliberate over measures suggested by the regulator and the bourse.

Recommendations endorsed by the 23-person council do not have regulatory teeth but have informed the work programmes of both the FSA and TSE in the past.

The council is also responsible to feed into periodic revisions of the domestic corporate governance and stewardship codes, which are applied to TSE-listed companies and institutional investors, respectively.

Updates have been made to the codes every three years since their inception, but that timeline is also now under review by the council. The next update to the governance code is scheduled to take place in 2024.

Meeting notes suggest the FSA and TSE could increase the mandatory representation of women on corporate boards to 30 percent by the end of the decade. This is in line with a 2020 target adopted by Keidanren, Japan’s powerful business lobby, and an existing requirement for companies to have 30 percent of women in their overall workforce.

Japan ranks below the global average on senior female representation in the workplace. The share of women on the boards of the UK’s largest 350 listed companies reached the 40 percent threshold this year, while Europe has reported an average of 36 percent.

Regulators said they could also “conduct an evaluation on the effectiveness of the board of directors” based on disclosures relating to boards and their committees included in annual reports.

In addition, regulators are considering actively promoting the enhanced disclosure of “human capital”, or workforce-related metrics, in international discussions around sustainability disclosures, such as the International Sustainability Standards Board (ISSB).

Human capital has increasingly become an FSA priority in recent years. The regulator included the topic among its strategic priorities for the current year, noting that “investors’ needs for information on human capital are increasing”.

The FSA also established a cross-industry human capital management consortium last year to develop best practices and connect companies to investors.

The council has announced plans to develop other measures aimed at providing investors with more useful and timely information to be used as a basis of engagement, but did not provide an indication of what these would encompass.

It will also consider ways to improve the implementation of new rules introduced by the TSE which require large, listed companies to disclose the implementation status of shareholder engagement priorities they are involved in.

The rules, which were introduced last month, do not mandate a specific format for disclosure but recommend reporting of the company personnel involved in a shareholder dialogue, actions taken and details of the participant shareholder.

Finally, the council is to consider the three-yearly revision schedule for the governance code, reflecting concerns that this would prevent timely improvements to corporate governance. It is widely expected that periodic updates will be scrapped in favour of incremental revisions as necessary.

Amane Fujimoto, an adviser to the International Corporate Governance Network (ICGN), said: “I do not believe the code will be revised in 2024 because there is criticism that regular revisions by automatic three-year cycles leads to a formalistic approach and increase of stipulations does not warrant effective improvement of corporate governance.”

While the council’s meeting notes serve as the basis for its deliberations, they have not been endorsed by members and could be expanded as discussions progress. A final set of recommendations is set to be published at a future date.

In February, Responsible Investor reported that such a workplan was being developed by regulators to boost constructive shareholder engagement, in parallel with an initiative to review existing acting-in-concert rules.

Much of the regulatory landscape in Japan is derived from the US, where acting-in-concert rules are seen by some as a key regulatory barrier to collaborative shareholder engagement.