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Policy Proposals  Business Law Keidanren's Views on Draft Revision of Japan's Corporate Governance Code

May 7, 2021

Sub-Committee on Capital Markets/Constructive Dialogue Taskforce
Committee on Financial and Capital Markets


To establish effective corporate governance that will help to create a new socioeconomic system for the post-COVID-19 era, it will be vital for companies to achieve sustainable growth and increase their corporate value over the mid- to long-term by actively furthering the interests of stakeholders including shareholders, customers, employees, and local communities, and contributing to accomplishment of UN Sustainable Development Goals (SDGs) and other solutions to global social issues.

Keidanren has promoted various corporate governance initiatives, based on the belief that each company should proactively establish its own corporate governance systems in line with its purpose. In November 2017 we revised Keidanren's Charter of Corporate Behavior and urged member companies to deliver on the SDGs by realizing Society 5.0 and emphasize environmental, social, and governance factors in their management. At the same time, we asked top management to take the lead in establishing effective governance systems. In September 2020 we published a policy proposal on "Promoting Constructive Dialogue between Companies and Investors," setting out efforts required of companies, investors, and government to promote constructive dialogue while considering changes in financial and economic circumstances brought about by the spread of COVID-19 infections. Moreover, in November 2020 we published ". The NEW Growth Strategy" to guide future Keidanren activities, proposing the establishment of sustainable capitalism through co-creation with multiple stakeholders.

Keidanren has also contributed to the deliberations of the government's Council of Experts Concerning the Follow-up of Japan's Stewardship Code and Japan's Corporate Governance Code by presenting its views in terms of supporting reforms to facilitate greater competitiveness of Japanese companies and increases in corporate value.

Based on the results of those deliberations, proposals for revision of Japan's Corporate Governance Code (the "Code") and Guidelines for Investor and Company Engagement (the "Guidelines") have recently been published.

These proposals are aimed at social development and increasing corporate value by promoting corporate initiatives on sustainability and diversity in human resources, and Keidanren welcomes them as concurring with our sustainable capitalism approach and global trends.

With companies now expected to play meaningful roles as social entities in recent years, from the perspective of increasing corporate value over the mid- to long-term it is important for Japanese enterprises to take these revisions as an opportunity to rebuild their own management systems so that they can be highly evaluated by domestic and international investors and stakeholders.

In implementing the revised Code and Guidelines, the most important thing of all will be to make a further shift from "formality" towards "substance" in investor-company engagement and corporate governance systems.

Based on the above perspectives, we present our views on the proposed revision of the Code below.

1. Thorough Application of the "Principles-Based Approach" and "Comply-or-Explain Approach"

The basis of the Code is that each company applies it in ways that make the optimal contribution to increasing its own corporate value, by adopting a principles-based approach rather than a rules-based approach. In keeping with the comply-or-explain framework, it is important for companies to improve governance by explaining to investors if they do not comply with the Code.

The keys to effective functioning of this mechanism are sincere efforts by companies and simultaneous efforts by institutional investors and proxy advisory firms. From the perspective of raising the "substance" of governance, investors and proxy advisory firms need to engage in constructive dialogue with the companies they invest in, rather than making uniform or formulaic decisions. The government and financial authorities should promote greater understanding of this point on the part of investors and other market players.

2. Verification of Effects of Code Revisions on Increases in Corporate Value

To practice corporate governance that leads to sustainable growth and an increase in corporate value over the mid- to long-term, companies need to make a further shift from "formality" towards "substance" in implementing the Code established by previous reforms. To this end, it is essential to objectively and comprehensively verify the outcomes achieved in management of Japanese companies and increases in corporate value over the mid- to long-term through introduction of the Code and previous revisions and, conversely, to verify what kind of outcomes have not been achieved and the reasons for this. In doing so, a full understanding should be gained of how each company exercises originality and ingenuity in accordance with its own circumstances while basing its actions on the Code.

3. Follow-up on Implementation and Operation of the Revised Code

Since the Code adopts a principles-based approach, a prerequisite for its implementation is that each company will exercise a certain degree of discretion as it operates flexibly according to its own situation. However, in practice various issues and questions are likely to arise regarding the interpretation and application of each principle in the Code. We expect that the relevant authorities will provide detailed responses and follow-up to resolve questions raised and issues faced by each company.

4. Details

(1) Nomination of Appropriate Independent Director Candidates (Principle 4.8, Supplementary Principle 4.11.1 of the Code)

Although Japanese companies have made steady progress on governance reforms and human resource development, an adequate human resource pool and pipeline have not yet been developed for all listed companies to nominate persons with sufficient qualities to contribute to sustainable corporate growth and increase corporate value over the mid- to long-term (Principle 4.8 of the Code) and persons with management experience in other companies (Supplementary Principle 4.11.1 of the Code).

In particular, proposed revisions to the Code state that at least one-third of directors of companies listed on the Prime Market should be independent directors (Principle 4.8 of the Code) and those companies will appoint all new independent directors at once at their general shareholder meetings from April 2022 onward, but it is possible that suitable candidates will not be selected in time. In that case, since we believe that the spirit of the revised code would be sufficiently fulfilled if companies, for example, noted their plan to appoint a specific number of independent directors at their 2023 general shareholder meetings, we hope that revisions will indicate the possibility of dealing with the matter in such ways.

We also believe that persons from financial institutions such as main financing banks would be strong candidates as persons with management experience in other companies, but under current circumstances Tokyo Stock Exchange (TSE) criteria for independence deem that so-called main financing banks and similar organizations are a company's "business counterparties", and proxy advisory firms uniformly reject persons from financial institutions, thus narrowing the range of independent director candidates. Through revision of TSE and proxy advisory firm criteria, flexibility should be ensured to make practical decisions.

(2) Disclosure of Goals, Policies and Status for Ensuring Diversity (Supplementary Principle 2.4.1 of the Code)

Since ways of ensuring diversity vary depending on the industry, type of business, business environment, etc., the purpose of ensuring diversity and its necessity should be clarified. Regarding methods of disclosing goals, each company should be able to present measures it deems necessary according to its actual circumstances from the perspective of increasing corporate value over the mid- to long-term, rather than formulaic or rigidly uniform approaches based on the assumption of quantitative targets, etc.#1


As the COVID-19 pandemic highlights the limitations of conventional capitalism, companies—which are key players in capitalism—need to increase their corporate value over the mid- to long-term by resolving global social issues, especially by delivering on the SDGs. The keys to achieving this are co-creation and dialogue with diverse stakeholders, and corporate governance plays a crucial role in realizing these aims.

Keidanren will continue urging member companies to make greater efforts to strengthen initiatives aimed at establishing corporate governance systems that are desirable from this perspective. At the same time, through engagement with a wide range of stakeholders we will promote efforts to realize our vision for Japan's business community.

  1. For example, companies should be able to make the following types of notations:
    • Present current figures and note plan to increase them by x%, or x persons in the future.
    • Present current figures and note plan to increase or maintain them (qualitative notation).
    • Target of x% for promotion of women to middle managerial positions. Current percentage accounted for by midcareer hires (X%) to be increased. No measurable targets for promotion of foreign nationals presented, taking into account the characteristics of the company's business as chiefly domestic (method of disclosing reason for not presenting goal).

Business Law