Support for Listed Companies

TSE incorporates the fundamental principles for corporate governance established in Japan's Corporate Governance Code ("the Code") into its listing rules to contribute to effective corporate governance in Japan.

As shown in the subtitle: Seeking Sustainable Corporate Growth and Increased Corporate Value over the Mid- to Long-Term, the Code establishes fundamental principles for effective corporate governance at listed companies in Japan. It is expected that the Code's appropriate implementation will contribute to the development and success of companies, investors, and the Japanese economy as a whole through individual companies' self-motivated actions so as to achieve sustainable growth and increase corporate value. As sustainability issues are important management issues that can lead to earning opportunities as well as risk mitigation, companies should further consider addressing these matters positively and proactively in terms of increasing corporate value over the mid-to long-term, and to this end, the Code includes items concerning not only governance but also social and environmental factors as used in ESG investment.

In June 2021, TSE implemented the 2nd revision of the Code, taking into account recommendations from the Council of Experts Concerning the Follow-up of Japan's Stewardship Code and Japan's Corporate Governance Code. The aim of this revision is to push companies to exhibit the more sophisticated levels of governance which will be needed for them to achieve growth within the changing environments triggered by the Covid-19 pandemic, and in light of the new market structure to be implemented at TSE from April 2022, indicate the higher levels of governance that will be expected of Prime Market-listed companies. As part of this, the new revised Code includes principles on "Promoting Diversity in Core Human Resources" and "Attention to Sustainability and ESG".

On diversity, the Council of Experts writes, "For a company to lead the non-linear changes brought about by the Covid-19 pandemic and achieve new growth, a diversity of perspectives and values is required, not only in the board, but also in management... It is [also] very important to build a system to ensure diversity in terms of gender, internationality, work experience, age, etc. at the middle managerial level, which supports the top management and board, and to ensure that these core human resources gain experience and eventually are appointed as the top management and directors."

On sustainability, the Council writes, "With the aim of increasing corporate value over the mid- to long-term, it is becoming increasingly important to positively and proactively address factors related to sustainability (including environmental, social and governance factors), not only as a risk, but also as earning opportunities. In terms of sustainability, there has been a growing focus on environmental elements, and recently the importance of social elements, such as investment in human capital, has also been emphasized. It has also been pointed out that it is desirable to advance more effective efforts with regard to intellectual properties in addition to investment in human capital from the perspective of strengthening international competitiveness." They add, "Further, from the perspective of promoting constructive engagement on sustainability between investors and companies, it is important to disclose information on sustainability."

The below are extracts from the newest version of the Code as revised in June 2021, focusing on environmental and social issues. We hope to contribute to the establishment of a sustainable society by promoting the Code and helping it take root among listed companies.

Japan's Corporate Governance Code: Seeking Sustainable Corporate Growth and Increased Corporate Value over the Mid- to Long-Term (excerpts)

General Principle 2

Companies should fully recognize that their sustainable growth and the creation of mid- to long-term corporate value are brought about as a result of the provision of resources and contributions made by a range of stakeholders, including employees, customers, business partners, creditors and local communities. As such, companies should endeavor to appropriately cooperate with these stakeholders.

The board and the management should exercise their leadership in establishing a corporate culture where the rights and positions of stakeholders are respected and sound business ethics are ensured.

Notes

Companies have a variety of important stakeholders besides shareholders. These stakeholders include internal parties such as employees and external parties such as customers, business partners and creditors. In addition, local communities form the foundation for the on-going business activities of companies. Companies should fully recognize that appropriate cooperation with these stakeholders is indispensable in achieving sustainable growth and increasing corporate value over the mid- to long-term.

Moreover, given that the Sustainable Development Goals (SDGs) were adopted at the United Nations Summit and the number of organizations supporting the recommendation of the FSB's Task Force on Climate-related Financial Disclosure (TCFD) has increased, there is a growing awareness that sustainability (mid-to long-term sustainability including ESG factors) is an important management issue from the perspective of increasing mid- to long-term corporate value.

In light of this, it is important for Japanese companies to further promote positive and proactive responses to sustainability issues. The appropriate actions of companies based on the recognition of their stakeholder responsibilities will benefit the entire economy and society, which will in turn contribute to producing further benefits to companies, thereby creating a virtuous cycle.

Principle 2.3 Sustainability Issues, Including Social and Environmental Matters

Companies should take appropriate measures to address sustainability issues, including social and environmental matters.

Supplementary Principle

2.3.1 The board should recognize that dealing with sustainability issues, such as taking care of climate change and other global environmental issues, respect of human rights, fair and appropriate treatment of the workforce including caring for their health and working environment, fair and reasonable transactions with suppliers, and crisis management for natural disasters, are important management issues that can lead to earning opportunities as well as risk mitigation, and should further consider addressing these matters positively and proactively in terms of increasing corporate value over the mid-to long-term.

Principle 2.4 Ensuring Diversity, Including Active Participation of Women

Companies should recognize that the existence of diverse perspectives and values reflecting a variety of experiences, skills and characteristics is a strength that supports their sustainable growth. As such, companies should promote diversity of personnel, including the active participation of women.

Supplementary Principle

2.4.1 Companies should present their policies and voluntary and measurable goals for ensuring diversity in the promotion to core human resources, such as the promotion of women, foreign nationals and midcareer hires to middle managerial positions, as well as disclosing their status.
In addition, in light of the importance of human resource strategies for increasing corporate value over the mid-to long-term, companies should present its policies for human resource development and internal environment development to ensure diversity, as well as the status of their implementation.

 

General Principle 3

Companies should appropriately make information disclosure in compliance with the relevant laws and regulations, but should also strive to actively provide information beyond that required by law. This includes both financial information, such as financial standing and operating results, and non-financial information, such as business strategies and business issues, risk and governance.

The board should recognize that disclosed information will serve as the basis for constructive dialogue with shareholders, and therefore ensure that such information, particularly non-financial information, is accurate, clear and useful.

Notes

Companies are legally required to disclose a wide range of information. The timely and appropriate disclosure of information in accordance with the relevant laws and regulations is essential for investor protection and securing market confidence. The board, kansayaku, the kansayaku board and external auditors all bear an important responsibility in this regard, starting with the establishment of an appropriate internal control system as to financial information.

Companies should actively strive to provide information other than what is required by laws and regulations.

It has been noted that while the quantitative part of financial statements of Japanese companies conform to a standard format and therefore excel with respect to comparability, non-financial information, such as financial standing, business strategies, risks and ESG (environmental, social, and governance) matters, is often boiler-plate and lacking in detail, therefore less valuable. The board should actively commit to ensure that disclosed information, including non-financial information, is as valuable and useful as possible.

Irrespective of whether the disclosed information is required by law, the appropriate provision of information is an effective means to develop a shared awareness and understanding with shareholders and other stakeholders, in particular given that as outsiders they suffer from information asymmetry. Appropriate information disclosure will also contribute to constructive dialogue based on Japan's Stewardship Code.

Principle 3.1 Full Disclosure

In addition to making information disclosure in compliance with relevant laws and regulations, companies should disclose and proactively provide the information listed below (along with the disclosures specified by the principles of the Code) in order to enhance transparency and fairness in decision-making and ensure effective corporate governance:
i) Company objectives (e.g., business principles), business strategies and business plans;
ii) Basic views and guidelines on corporate governance based on each of the principles of the Code;
iii) Board policies and procedures in determining the remuneration of the senior management and directors;
iv) Board policies and procedures in the appointment/dismissal of the senior management and the nomination of directors and kansayaku candidates; and
v) Explanations with respect to the individual appointments/dismissals and nominations based on iv).

Supplementary Principle

3.1.3 Companies should appropriately disclose their initiatives on sustainability when disclosing their management strategies. They should also provide information on investments in human capital and intellectual properties in an understandable and specific manner, while being conscious of the consistency with their own management strategies and issues.
In particular, companies listed on the Prime Market should collect and analyze the necessary data on the impact of climate change-related risks and earning opportunities on their business activities and profits, and enhance the quality and quantity of disclosure based on the TCFD recommendations, which are an internationally well-established disclosure framework, or an equivalent framework.

General Principle 4

Given its fiduciary responsibility and accountability to shareholders, in order to promote sustainable corporate growth and the increase of corporate value over the mid- to long-term and enhance earnings power and capital efficiency, the board should appropriately fulfill its roles and responsibilities, including:
(1) Setting the broad direction of corporate strategy;
(2) Establishing an environment where appropriate risk-taking by the senior management is supported; and
(3) Carrying out effective oversight of directors and the management (including shikkoyaku and so-called shikkoyakuin) from an independent and objective standpoint.
Such roles and responsibilities should be equally and appropriately fulfilled regardless of the form of corporate organization - i.e., Company with Kansayaku Board (where a part of these roles and responsibilities are performed by kansayaku and the kansayaku board), Company with Three Committees (Nomination, Audit and Remuneration) or Company with Supervisory Committee.

Principle 4.2 Roles and Responsibilities of the Board (2)

The board should view the establishment of an environment that supports appropriate risk-taking by the senior management as a major aspect of its roles and responsibilities. It should welcome proposals from the management based on healthy entrepreneurship, fully examine such proposals from an independent and objective standpoint with the aim of securing accountability, and support timely and decisive decision-making by the senior management when approved plans are implemented.
Also, the remuneration of the management should include incentives such that it reflects mid- to long-term business results and potential risks, as well as promotes healthy entrepreneurship.

Supplementary Principle

4.2.2 The board should develop a basic policy for the company's sustainability initiatives from the perspective of increasing corporate value over the mid- to long- term.
In addition, in light of the importance of investments in human capital and intellectual properties, the board should effectively supervise the allocation of management resources, including such investments, and the implementation of business portfolio strategies to ensure that they contribute to the sustainable growth of the company.

 

For more information, see the link below:

Corporate Governance Code