(FSA) Panel for Vitalizing Financial and Capital Markets Releases Recommendations

The Panel for Vitalizing Financial and Capital Markets* has released its recommendations. (*Chairman, Takatoshi ITO Professor, Graduate School of Economics, The University of Tokyo). The tentative English Translation can be found at this link: http://www.fsa.go.jp/en/refer/councils/vitalizing/20131213/01.pdf

The sections relating to corporate governance appear below. [Note by BDTI: it is surprising that the Panel does not refer to a policy to have the FSA or the TSE develop a Corporate Governance Code, since a Stewardship Code is in the works and almost every other market in the world has some form of Corporate Governance Code in place, particularly before considering creating a stewardship code.]

「3-2. Strengthening corporate governance to improve the medium- to
long-term competitiveness and management capabilities of

In order for the financial and capital markets and industries to
develop in tandem like two wheels of a cart, reforms of financial and
capital markets and enhancement of corporate competitiveness will need
to be conducted in parallel over the medium to long term, and
companies’ management capabilities needs to be improved. Winning the
confidence of overseas investors in the competitiveness and
management capabilities of Japanese companies is also a key issue.

In 2020, dynamic and sound turnovers and restructurings will take
place among companies and businesses within companies, second
chances will be broadly allowed, and new businesses will evolve and
grow actively. In addition, society will be one in which many truly global
companies flourish as attractive investment destinations over the mid to
long term.

From this perspective, the following issues should be addressed

While examining their managerial strengths and weaknesses, such
as teamwork in the field and technological competence, companies
themselves should make efforts to reform their business by selecting
sectors with growth potential and concentrating their resources in such
sectors. By achieving high-quality corporate governance and securing
shareholder returns on equity (ROE) on par internationally, the
competitiveness of companies should be enhanced. From the
perspective of promoting such efforts and thus realizing higher ROE of
Japanese companies, development and promotion of products tracking
the JPX Nikkei Index 400 should provide Japanese companies with
effective incentives. Accordingly, these products should be used widely
in the asset management of GPIF and other funds.

To bring about high-quality corporate governance, companies should
introduce outside (independent) directors in line with the partial revisions
to the Companies Act submitted to the Diet in November this year and
the revisions to the listing rules of the Tokyo Stock Exchange, which are
expected to be implemented in February 2014. In line with such
movements, it is necessary to encourage listed banks and banking
holding companies to introduce independent outside directors through
the supervision of financial institutions.

In addition, a wide range of institutional investors, including asset
managers (asset management companies) and asset owners (pension
funds, etc.), should engage in constructive dialogues with companies to
encourage their efforts to enhance the management capabilities. To this
end, it is necessary to promptly draft the Japanese Version of the
Stewardship Code, which is now under discussion. In addition, the FSA
needs to publish the list of institutional investors that accepted the Code,as well as their disclosure statuses in accordance with the Code, and to fully disseminate the Code both at home and abroad.

As the next step, the following issues should be addressed.

First, further development and establishment of market indexes
which focus on the growth potential of companies will effectively promote
turnover in companies and give them incentives to select and focus on
growth sectors. Consideration should also be given to the modalities of
business restructuring and insolvency, in reference to the trends in
Germany and elsewhere, to ensure that companies have sound turnover.

Attention should also be paid to the state of corporate governance,
taking into account the degree to which outside directors have been
appointed in line with the supplementary rules to the partially amended
Companies Act, and to further approaches to strengthening corporate

Further improvements should be made to the Japanese Version of
the Stewardship Code through periodic reviews in light of the degree of
implementation of the Code, including its acceptance and disclosure
among institutional investors. Periodic reviews should be undertaken to
raise the awareness among institutional investors and thereby to further
firmly establish the Code as standard practice.

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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