Eiji Masuda, Daiki Akahane and Takero Yoshida at Masuda & Partners Law Office in Tokyo look at changes to Japan’s corporate governance regime

While corporate governance of Japanese companies has been internationally rated as not “up to par” (in moderate terms) among developed economies, the recent regulatory developments targeted for listed companies are expected to change the tide.

In response to the final proposal of “Japan’s Corporate Governance Code” (the “Draft Code”), which was published earlier this year by the Council of Experts Concerning the Corporate Governance Code (the “Council of Experts”), the Tokyo Stock Exchange (the “TSE”) announced on May 13 2015 the related amendments to its Securities Listing Regulations (yuka shoken joujou kitei) (the “SLR”), which consist of (i) adoption and incorporation of the Draft Code (without any substantive revision) as the SLR’s exhibit (such adopted code is hereinafter referred to as the “Code”) and (ii) additional and revised provisions to the SLR for enforcement purposes. The amendments came into effect as from June 1 2015.

The Code consists of five General Principles: 1—Shareholder Rights and Equal Treatment of Shareholders; 2—Proper Cooperation with Stakeholders Other Than Shareholders; 3—Ensuring Appropriate Information Disclosure and Transparency; 4—Responsibilities of the Board; and 5—Dialogue with Shareholders). These are accompanied by Principles and Supplementary Principles providing more detailed rules.

We provide below a summary of the Code and the related SLR revisions as well as its expected ramifications for the investors in Japanese listed companies.

“Principles-based approach” and “comply-or-explain approach”

The Draft Code was characterised by the two underlying approaches, one of which is the principles-based approach (as opposed to the rules-based approach), and the other is comply-or-explain approach.

The first approach (principles-based) is specifically embodied in non-prescriptive nature of the Draft Code provisions, where certain principles are drafted in general terms to leave flexibility.

The second approach (comply-or-explain), which is specifically declared in the introductory comments to the Draft Code, leaves room for companies to consider what should work for them to achieve effective corporate governance, and it permits them to decide whether to comply with the principles under the Code or choose not to do so, with a proper explanation of the reasons for such non-compliance, provided that companies should not offer a superficial explanation with boiler-plate expressions.

These two approaches are also maintained in the TSE’s adoption of the Code, but it must be noted that, under the amended SLR provisions, the comply-or-explain approach is fully applicable only to companies listed on the 1st and 2nd sections of the TSE, which companies are required to explain the reasons for non-compliance with any of the Principles in the Code (General Principles, Principles and Supplementary Principles). Companies listed on Mothers and Jasdaq are also required to explain the reasons for non-compliance with the Code, but such explanation requirement is triggered only by non-compliance with the five General Principles. Moreover, foreign companies listed on the TSE are exempt from such explanation requirements.

Shareholder rights and equal treatment of shareholders (General Principle 1)

General Principle 1 of the Code is set out to secure the rights and equal treatment of shareholders, and provides in its detailed Principles, among others, for (a) explanation and disclosure of certain information related to its equity capitalisation (Principles 1.3–1.6) and (b) appropriate measures to ensure the exercise of voting rights at shareholders’ meetings (Principles 1.1 and 1.2).

First, companies should explain their basic strategy with respect to their capital policy (Principle 1.3), and in particular, policies with respect to cross-shareholdings if applicable (Principle 1.4). This requirement might lead some companies with cross-shareholdings (especially those doing so only for business relations) to think twice about such cross-shareholdings. In addition, companies should also provide sufficient explanation about their anti-takeover measures (Principle 1.5).

Second, companies should take appropriate measures to fully secure shareholder rights (Principle 1.1), and in particular, to ensure the exercise of shareholder rights at general shareholders’ meetings (Principle 1.2).

Supplementary Principles to Principle 1.2 specifically require prompt delivery of convening notices to allow shareholders sufficient time to consider the agenda (Supplementary Principle 1.2.2), and steps to create an infrastructure allowing electronic voting and preparing English translations of the convening notices, bearing in mind the number of institutional and foreign shareholders (Supplementary Principles 1.2.4).

Proper cooperation with stakeholders other than shareholders (General Principle 2)

General Principle 2 requires companies to make efforts to cooperate with their stakeholders other than shareholders, such as employees, customers, business partners, creditors and local communities. In particular, Principle 2.3 requires companies to take appropriate measures to address sustainability issues, including social and environmental matters.

Ensuring appropriate information disclosure and transparency (General Principle 3)

General Principle 3 requires companies to make appropriate information disclosure in compliance with relevant laws and regulations and also to make efforts to actively provide information beyond that required by law.

In particular, companies should disclose and proactively provide the information such as basic views and guidelines on corporate governance (Principle 3.1), and the board should ensure that such information is not boiler-plate or lacking in detail (Supplementary Principle 3.1.1). In addition, companies should take steps for providing English language disclosures to a reasonable extent, bearing in mind the number of foreign shareholders (Supplementary Principles 3.1.2).

Responsibilities of the board (General Principle 4)

General Principle 4 requires the boards to appropriately fulfill their roles and responsibilities, including setting of the broad direction over corporate strategy, in order to promote sustainable corporate growth and the increase of corporate value over the mid- to long-term and enhance earnings power and capital efficiency (General Principle 4).

While a wide range of requests are made by the related Principles and Supplementary Principles in this respect, one of the noteworthy ones would be that made in Principle 4.8, which requires companies to appoint at least two independent directors. The Principle 4.8 further requests companies to disclose a roadmap for appointing at least one-third of directors as independent directors, if a company believes it necessary to do so in its own judgment. In connection with this requirement, Principle 4.9 requires the boards to establish and disclose standards for “independence” of directors.

Dialogue with shareholders (General Principle 5)

General Principle 5 requires companies to engage in constructive dialogue with shareholders even outside of the general shareholders’ meetings. In particular, Principle 5.1 requires the board to positively respond to requests from shareholders to engage in dialogue to a reasonable extent and to establish, approve and disclose policies concerning the measures and organisational structures aimed at promoting constructive dialogue with shareholders.

Eiji Masuda


Masuda & Partners Law Office



Daiki Akahane

Of Counsel

Masuda & Partners Law Office



Takero Yoshida


Masuda & Partners Law Office


About the authors

Masuda & Partners, founded by the managing partner Eiji Masuda in 2008, is a full service law firm advising on a wide range of business law matters including general corporate, M&A, financial regulations, and commercial litigations. In particular, the firm’s dispute resolution group vigorously works on large-scale and complex commercial disputes, both domestic and cross-border. The firm also advises on compliance, risk/crisis management and employment law matters, backed by the managing partner Eiji Masuda’s experience from serving as general counsel and executive officer of Merrill Lynch Japan Securities Co Ltd.

The firm’s managing partner Eiji Masuda received his LL.M. from Columbia Law School in 2003, and LL.B. from Chuo University in Tokyo, Japan in 1987. He is admitted to practice law in both Japan and the State of New York.