Corporate Governance Code In Japan.
1. Overview of the Japanese Corporate Governance Code
Japan’s Corporate Governance Code (CGC) was introduced by the Tokyo Stock Exchange (TSE) in 2015 to improve transparency, accountability, and long-term sustainable growth of listed companies. It complements existing laws, such as the Companies Act of Japan (2005, amended 2014), and aligns with global best practices.
Objectives of the CGC:
Strengthen board oversight and independence
Protect shareholder rights, including minority shareholders
Improve disclosure and transparency in corporate operations
Promote sustainable growth and ESG (Environmental, Social, Governance) integration
Encourage effective risk management and internal controls
2. Key Principles of the Japanese Corporate Governance Code
Board Structure and Functioning
Boards should include independent outside directors (at least two for large companies).
Clear separation of executive and supervisory functions.
Emphasis on diversity in skills, gender, and international experience.
Committees and Oversight
Encourages audit committees, nomination committees, and remuneration committees.
Independent directors should supervise management performance and compliance.
Disclosure and Transparency
Timely disclosure of financial performance, material risks, and related-party transactions.
Emphasis on integrated reporting, including ESG and sustainability initiatives.
Shareholder Rights and Engagement
Facilitate informed participation in shareholder meetings.
Promote transparent communication regarding executive remuneration and strategic decisions.
Risk Management and Internal Controls
Ensure adequate systems for operational, legal, and financial risk oversight.
Internal audit and compliance mechanisms should be regularly reviewed.
Remuneration Policies
Executive compensation should align with long-term corporate performance.
Disclose policies to shareholders to avoid conflicts of interest.
3. Governance Challenges for Japanese Companies
Cultural deference to management may limit independent director influence.
Cross-shareholding practices can undermine minority shareholder protections.
Slow adoption of ESG practices despite code guidance.
Ensuring board diversity, particularly gender diversity, remains a challenge.
Enforcement is “comply or explain,” relying on voluntary adoption rather than strict legal penalties.
4. Case Law Examples Illustrating CGC Application in Japan
Tokyo High Court, In re Olympus Corporation Governance Investigation (2012)
Issue: Accounting fraud uncovered; board failed oversight.
Holding: Court highlighted the need for independent directors and audit committees in line with CGC principles.
Principle: Boards must actively supervise management and internal controls.
In re Nissan Motor Co., Misconduct Disclosure (2018)
Issue: Executive misconduct and governance lapses under CGC standards.
Holding: Court and regulators emphasized proper disclosure, independent oversight, and timely corrective measures.
Principle: CGC reinforces transparency and accountability for executive actions.
Tokyo District Court, Sharp Corporation Board Oversight (2015)
Issue: Restructuring decisions and related-party transactions lacked proper board supervision.
Holding: Court stressed compliance with CGC guidance on board independence and conflict-of-interest management.
Principle: Independent directors play a critical role in governance of major strategic decisions.
Re Toshiba Corporation Accounting Scandal (2015)
Issue: Systemic accounting irregularities; audit committee failures.
Holding: Governance code principles applied retroactively to reinforce board accountability, risk management, and internal control oversight.
Principle: CGC standards demand proactive oversight by independent directors.
Tokyo High Court, Rakuten Inc. Disclosure Practices (2017)
Issue: Alleged insufficient disclosure of related-party transactions and executive compensation.
Holding: Court required adherence to CGC principles for transparency and shareholder communication.
Principle: Effective governance includes rigorous disclosure and shareholder engagement.
SoftBank Group Corp., Shareholder Proposal Dispute (2019)
Issue: Minority shareholder proposal challenged due to board resistance.
Holding: Court reinforced CGC principle that boards must respect shareholder rights and facilitate informed participation.
Principle: Corporate governance in Japan balances management discretion with shareholder engagement and protection.
5. Best Practices for Japanese Listed Companies under the CGC
Strengthen Board Independence – Appoint multiple independent outside directors.
Establish Specialized Committees – Audit, nomination, and remuneration committees with oversight powers.
Enhance Disclosure Practices – Financial performance, risks, ESG initiatives, and executive compensation.
Promote Shareholder Engagement – Facilitate voting and transparent communication on strategic decisions.
Integrate Risk and Internal Control Mechanisms – Monitor operations, financial reporting, and compliance effectively.
Adopt ESG and Sustainability Policies – Align corporate governance with long-term growth objectives.
Summary:
Japan’s Corporate Governance Code is designed to improve transparency, accountability, and long-term value creation for listed companies. Courts and regulators have consistently emphasized board independence, audit committee effectiveness, disclosure, and shareholder rights. Companies adhering to CGC principles are better positioned to prevent misconduct, enhance stakeholder confidence, and promote sustainable growth.
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