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Japan

Corporate governance beyond compliance

Home / Hermes EOS Blog / Japan – Corporate governance beyond compliance

Karin Ri,
18 February 2015
GovernanceStrategy

Japan’s first ever Corporate Governance Code
Hermes EOS is delighted about the introduction of Japan’s first Corporate Governance Code. Over the past few years we have had over 20 meetings with Japanese regulators and policy-makers to push for the introduction of such a code, and most recently, we responded to the Financial Services Agency and the Tokyo Stock Exchange on its consultation. In the wake of the introduction of the country’s Stewardship Code in April 2014, the development of a Corporate Governance Code represents a significant step forward towards achieving effective corporate governance, the sustainable growth of Japanese companies and long-term value creation. Following a period of public consultation, the code is scheduled to take effect from June 2015.

Effective comply-or-explain
We firmly welcome the comply-or-explain approach taken by the Corporate Governance Code. The concept of comply-or-explain – whereby companies that fail to adhere to the code need to explain their reason for that decision – promotes flexibility, innovation and continuous development. But companies should not confuse superficial compliance with good corporate governance. While the effective implementation of comply-or-explain is likely to take time to develop, a box-ticking approach or boilerplate explanations should be strongly discouraged. Explanations should be tailored to the company’s position and be sufficiently informative to enable shareholders to take a view. We believe that a thoughtful and effective use of the comply-or-explain mechanism will help facilitate constructive dialogue between companies and their shareholders, as well as foster trust and a good long-term relationship.

Enhancement of board dynamics
To create the right dynamics and, more importantly, strongly performing companies, boards should ideally comprise members that have an appropriate and diverse range of skills, knowledge and experience. Their ability to contribute and add value is just as crucial as the overall number of independent directors sitting on the board. In our response to the consultation we therefore suggested that the quality of the individuals chosen as independent directors should be further addressed in the Corporate Governance Code, by placing greater focus on the skillsets and professionalism of the appointed outside directors, not solely on their independence.

Fostering dialogue
Promisingly, one of the Corporate Governance Code’s key principles encourages constructive dialogue between companies and investors. In our response, we highlighted that the board as a whole is responsible for ensuring that meaningful dialogue with shareholders takes place. We have therefore called on Japanese companies to provide better access to senior management and the board, including independent directors, to enable shareholders to discuss strategy, capital policy and corporate governance with the right individuals.

In light of the implementation of the new code, we have also urged Japanese companies to approach their own governance reform in a strategic manner, be prepared to implement significant changes and demonstrate a clear commitment from the top to the development of a corporate culture which supports sustained growth and profitability.

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