The Council of Experts Concerning the Follow-up of Japan's Stewardship Code and Japan's Corporate Governance Code, convened by Japan's Financial Services Agency, published an opinion statement in April recommending additional steps toward governance reform and flagging several issues for further discussion.

Following next year’s anticipated revision of the Stewardship Code, service providers will likely be requested to take more actions to strengthen organizations and disclosures.

In our interview article of February 21, titled "Japan's FSA: Moving ahead on governance reform," Toshitake Inoue, Director of the Corporate Accounting and Disclosure Division at Financial Services Agency (FSA), stated: "Prior to the annual general meeting season in June, the Council is expected to release a statement concerning effective dialogues between companies and investors, and other activities intended to promote further progress in corporate governance reform."

On April 24th, the statement appeared on the FSA web site: "Recommended Directions for Further Promotion of Corporate Governance Reform".

Following a review of progress made since the revision of the Stewardship and Governance codes, the Council identified ongoing issues for corporations and institutional investors that have impeded reform.

Issues for corporations:

  • Nominating and remuneration committees fail to function properly while imbalances persist in their composition and poorly qualified independent directors continue to be appointed;
  • Cross-shareholding in some corporate pension accounts remains excessively high;
  • Companies do not adequately explain or disclose board activities and board evaluation results.

Issues for investors:

  • Dialogue with investee companies remains formulaic and does not contribute to enhancement of mid- to long-term corporate value;
  • Some institutional investors, while demanding more extensive disclosure from companies, fall short in fulfilling their own disclosure responsibilities;
  • Abuse of the "comply or explain" principle contributes to a superficial understanding of the Code and the requirements for compliance.

The statement also recommended issues for review that will not necessarily be included in the next revisions of the Code. Key issues for the Stewardship Code, scheduled for revision in 2020, are highlighted among three participants.

  1. Asset Managers
    • Asset managers should improve disclosure of the reasons for their voting decisions as well as their stewardship activities with companies, and the results and self-evaluations of those activities.
    • When engaging with companies on sustainability issues, including ESG factors, asset managers should promote dialogue that is consistent with their investment strategies and that leads to sustainable growth of companies and their mid- to long-term gains in corporate value.
  2. Asset Owners, including Corporate Pension Funds
    • Greater effort is needed to support stewardship activities of corporate pension funds in collaboration with the business sector and other stakeholders.
  3. Service Providers
    • Proxy advisors should secure sufficient and appropriate human resources and organizational structures, disclose their processes (including resources and organization) for developing voting recommendations, and directly and proactively engage with companies as necessary.
    • Investment consultants should manage conflicts of interest and disclose their activities, in light of their roles as important actors supporting the stewardship activities of corporate pension funds.

The council added the following points needing further discussion for the Corporate Governance Code.

  • Starting with internal audits, the Council will review measures for ensuring confidence in audits in order to secure effective "defensive corporate governance".
  • Discussions regarding group governance should involve establishing stricter governance of listed subsidiaries.

The statement was published in advance of the May-June high season for annual general shareholder meetings at Japanese listed companies. During and after the season, FSA officials will closely follow asset managers to see how their actions deal with the Stewardship Code.

One FSA official said they expected to see a lot of improvements in various areas, especially in the number of Stewardship Code signatories from corporate pension funds, the disclosure of proxy advisors, and the stewardship activity reports of asset managers.

The FSA will likely convene a new session of the Council of Experts within the year to consider the next revisions to the Stewardship Code.

FSA's announcement of the "Follow-up" meeting: https://www.fsa.go.jp/en/news/2019/follow-up/20190424.html