Japan’s New Corporate Governance Code – Draft Finalized! 

Japan's Council of Experts Concerning the Corporate Governance Code, headed bythe Financial Services Agency (FSA) and Tokyo Stock Exchange (TSE) comprising a joint secretariat, has finalized its draft of Japan's first Corporate Governance Code. The draft hasput out for public comments, the deadline for which is January 2015 in the case of English-languagecomments. In 2015, it will be reflected in the TSE's new listing standards, which must come into effect by June of 2015 (i.e. before the main AGM season).

The 26-page Japanesedraft, which is evenlonger in its English version, contains many detailed provisions. It is based on the OECD's Principles of Corporate Governance (an OECD official was advisor), but of coursealso reflectspresent conditions and the legal framework in Japan. It will apply to all TSE-1 and TSE-2 (2nd level) listed firms, and with some possible adjustment for the burdens of compliance for smaller firms, also to all other exchange-traded companies in Japan.

Assuming that it does not get watered down, the draft is an excellent start, considering that this is Japan's very first governance code and the intensity of historicalopposition to certain of its features. For example, among many other itemsit includes rules and references to the following, enforced on a comply-or-explain basis:

Multiple independent non-executive (outside) directors (INEDs). (There must be at least two INEDs appointed to the board)
De facto encouragement that one-third of the board of global companies be composed of INEDs
Directors' fiduciary obligations to shareholders as well as other stakeholders
Principle of separation of management functions from oversight functions
Encouragement of prudent risk-taking, efficient capital allocation, and sustainability
Suggestionof a committee mainly composed of INEDS to advise onnominations, compensation, andother matters, as a best practice
Explanation/disclosure of company policy and procedures regarding the nomination and compensation of board members, and the reasons for nominating each board member
Explanation/disclosure of company policy with respect to the Code's rules
Executive sessions where only external board members are present
Provision of information to all directors. Statutory auditorswill beexpected to help with information provision
Internal systems for whistle-blowing and reporting
Director training and ongoing education/updates is required.Company policy regarding directortraining is mustbe disclosed
Financial knowledge required for at least one statutory auditor
Board self-evaluation process, and evaluation of executives
Succession planning and oversight of succession planning
Board members may hire independent outside advisors at company expense
Discouragement of over-boarding; disclosure of concurrent all director positions, and corporate policy regarding concurrent positions
Encouragement of board diversity and the appointment of female directors
Disclosure required as to the “reason” and logic for cross-shareholdings
Disclosure of arrangements for constructive engagement with/by shareholders

As the person who in 2013 initially proposed to the LDP that it include thispolicy for an FSA-supervised corporate governance code in its growth strategy, as well as manyof the features listed above, I am extremely pleased that Japan is taking this crucialstep towards improving corporate governance and raising economic productivity. In the context of Japan, a corporate governance code with this degree of substanceis nothing short of revolutionary. Government and stock exchange policy with respect to governance has finally been clarified,with much more specificity than before. The direction of the futurehas been set.

Among other things, this means that more and moreJapanese companies will now recognize theimportanceof rigorous governance and global best practices, and – among other things – will send more of their executivesto director training programs such as those whichyBDTI provides.Would-be or currently appointed outside directors will also attendingreaternumbers. (Note: there are very few other training organizations, and BDTI is the only government-certifiedpubic-interestnon-profit engaged in these activities.)

There is probably no economy in the world where there is more upside to these trends than in Japan.

Nicholas Benes
Representative Director,The Board Director Training Institute of Japan

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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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