Exploring Japan’s Corporate Governance Trends

Japan’s corporate governance reforms in recent years have been described as “game-changing” for Japanese equities and the broader economy and society. They include revisions to the Corporate Governance Code and the Stewardship Code, which promotes independent directors, diversity and sustainability reporting, as part of the government’s growth strategy.

The Tokyo Stock Exchange has also required all listed companies on its “Prime” and “Standard” markets to take “action to implement management that is conscious of the cost of capital and stock price.” This includes directing listed companies to “comply or explain” if they are trading below a price-to-book ratio of one (seen as an indicator of poor capital management) as well as enhancing information disclosure and promoting shareholder rights and diversity, including the “active participation” of women.

Japanese Prime Minister Fumio Kishida has also urged honebuto no hoshin (“big-boned policies”) to promote gender equality, including for women to hold at least 30% of executive posts at Prime-listed companies by 2030.

In June, members and guests of the British Chamber of Commerce in Japan joined a breakfast event on the topic of “Exploring Trends in Corporate Governance.” The panel comprised Christian Sealey, chief executive officer of investor relations firm Morrow Sodali, International; Makiko Hamabe, representative of Makiko Hamabe Office; and Melanie Brock, senior advisor at Tanarra and Pollination Group. Heather Prosser, managing director, head of sustainability at Morrow Sodali Japan, served as moderator.

Referring to the “comply or explain” approach, Hamabe said the Japanese Corporate Governance Code was inspired by the UK Corporate Governance Code, which uses a similar “comply or explain” approach.

“The UK code starts with the phrase, ‘A successful company’ but doesn’t define what success means. It seems there is a mutual understanding between listed companies and the stock market about what a successful listed company is,” she explained.

“In contrast, the Japanese Corporate Governance Code clearly defines successful listed companies as achieving sustainable growth and the creation of medium- to long-term corporate value. This detailed definition is needed in Japan as people in Japan have different interpretations of what makes a listed company successful.”

Hamabe said the Japanese concept of sanpo-yoshi (three-way satisfaction)—creating mutual benefit for sellers, buyers and society—had long guided Japanese industry. However, while this concept encourages corporate longevity, it fails to reflect shareholders’ interests.

Another factor behind Japan’s past corporate governance practices is a long reliance on indirect (bank) financing and cross-shareholdings, which together led management to “focus more on stability rather than growth,” she said.

In contrast, the Corporate Governance Code “encourages companies to see shareholders as important stakeholders, and to foster long-term growth and value creation.”

Morrow Sodali’s Sealey said well-run companies “have embraced the ‘G’ in ESG.

“They have understood the need to improve their relationship with their key stakeholders, their larger investors and also mid-cap and smaller investors, to really enhance the level of disclosure and how they are communicating that strategy externally as well as internally. And they are very good at setting a vision: a clear path and strategy,” he said.

He noted a recent push by companies across the region to incorporate “non-financial” measures into executive compensation to drive action on ESG targets.

Brock stressed the need for board directors to actively push for the promotion and training of women in senior management roles.

“I do think change is taking place. I think it very important that we monitor it, hold people to those actions and then call them out when it isn’t [implemented]. On the boards I’m on, there’s broad and wide discussion about change and the need for it,” she said.

Sealey said it was important for boards to foster not only gender diversity but also a “diverse skill set.”

Hamabe pointed to a November 2023 survey by the Gender Equality Bureau at the Cabinet Office that found women made up 13% of board positions at Prime companies. Yet while the percentage of female, independent outside directors was higher at 19%, only 2.5% of internally appointed executive directors were women.

“There is a glass ceiling in Japanese companies. Women should be promoted in Japanese companies using the inside path to become executive directors. If the number of female executive directors increases, then the number of female independent directors will increase even more, too,” she said.

Brock said the Kishida Cabinet’s June 2024 policy on women could help drive change, as it calls for a range of measures across government, business and non-profit organisations.

“I was pleased to see the comprehensive nature of the initiatives the Japanese government is looking at. I would like to ask the Japanese prime minister, though, to include more women in his Cabinet and also in the ranks of vice ministers and parliamentary ministers. If he’s going to have a target of 30% of women on boards, his own decision to not appoint one single women to the group of 54 vice/parliamentary ministers should surely result in the mirror being turned on himself,” she said.

Looking ahead, Sealey said there was “more momentum coming from the market, regulators and companies to do more.”

“Changes in demographics, population decline, the unbundling of companies—there are a lot of things that are going to happen in this market over the coming decade which will be transformative for Japan,” he said.

“The amount of dialogue, the pushback that we are getting from the younger generations— they want a greater say, they want work-life balance, they are driving a paradigm shift that we’ve never seen.”

Hamabe noted how Japan’s corporate governance changes promote risk-taking, albeit managed, rather than the traditional Japanese approach of stability.

Asked about external factors driving change, Brock noted the significance of famous US investor Warren Buffett’s move to invest in Japanese trading houses, while Hamabe pointed to the influence of “activist” investors.

“I’m telling Japanese companies that before activists target them they need to have deep dialogues with shareholders, and improve what they have to change while not showing large gaps between their ‘as is’ and ‘to be’ states,” she said.