Has the market restructuring of the Tokyo Stock Exchange taken over Japan’s Corporate Governance code discussion?


Chie Mitsui


On April 7, 2021, the third revision of Japan’s Corporate Governance Code (CG Code) was announced, and a public consultation ran until May 7.

CG Codes, which have been introduced in many countries, are generally revised every few years to incorporate contemporary governance issues. The issues discussed in the recent revisions in the UK, EU, Australia, and elsewhere are focused on “sustainability” and “consideration of stakeholders (other than shareholders)”. In addition to seeking to maximize short-term shareholder value, management teams are being asked to reconsider their social responsibilities, especially in dealing with climate change risks and human rights.

A link between the CG Code revisions and the market restructuring?

However, the priority issue of this revision in Japan looked a little different. One of the other problems in Japan is the market structure. Over the past couple of years, the Tokyo Stock Exchange (TSE) has been discussing changes to the current 1st and 2nd markets, and two emergent markets. The roles of the 2nd and emergent markets were unclear. The 1st market has 2000 companies – all members of the TOPIX index, which is considered too large as a top-level market. Therefore, the TSE proposed a market restructuring to set up a Prime market for the largest market cap companies, with the rest in a Standard market. The threshold of the Prime market will be around $100 million as a market capitalization of shares in circulation. They will also be required to have good corporate governance. So naturally the CG code discussions were influenced by the market restructuring. As a result, many debates have revolved around the level of governance required for companies in the proposed Prime market.

As investors, we have been discussing the issue for a long time. With 2000 companies belonging to the 1st market, it has been difficult to apply strict principles for governance and disclosure, as well as there being a lack of incentive for growth. When using the TOPIX index, which currently includes all members of the 1st market, as a benchmark, the burden of engagement and exercising voting rights is extremely heavy for investors. In considering the thresholds for companies listed on the new Prime market, the TSE and the Financial Services Agency (FSA) have looked to items such as the minimum number of independent directors, enhancement of the board’s functions, and disclosure. In other words, the purpose of this CG Code revision became to answer the question: “What level of governance should Prime market companies have?”

Is the new level of governance high enough for the Prime market?

After three months of deliberations by the FSA and TSE, the main points of the requirements for companies listed on the Prime market are as follows:

  • More than a third of directors must be independent.
  • The board’s skills matrix must be disclosed.
  • A majority of the members of each committee must be independent directors.
  • Required information needs to be disclosed in English.
  • Information about sustainability considerations must be disclosed, along with alignment with the Sustainable Development Goals and the Taskforce for Climate-related Financial Disclosures framework.
  • A governance system should be established for listed subsidiaries, ensuring the reliability of audits, internal controls, and risk management.
  •  Disclosures must cover promotion of women, foreigners, mid-career hires as managers and core human resources, with measurable goals and their status.
  • There is a requirement to introduce an e-voting platform at least for institutional investors.

Very few requirements for other companies were changed this time.

Whether the proposed revised CG Code is appropriate for the Prime market depends on what kind of market the authorities are aiming for. The initial aim of the market and governance reform was to enhance company performance and efficiency. The aim is for Prime companies to be at the top level globally, and for other companies to aspire to be like them. In my opinion, the level of these reforms is not higher than in other countries. Maybe this is because so many companies want to be members of the Prime market, and so the bar has been set too low.

We need to get back to the governance discussion

In many countries, the audit committee, remuneration committee and nominations committee are required to have only independent directors. Often, the chairperson must be independent. If we look around to other Asian friends, for example, Taiwan is mandating English disclosures for all listed companies, in stages. Some countries are beginning to mandate climate change disclosures and focusing on the governance of small-mid size companies.

But, in Japan, the focus of the discussion about revising the CG Code seems to have been around the threshold of the Prime market, rather than important contemporary global governance issues.

Instead of negotiations over who will join the Prime market, shouldn’t we discuss what kind of governance is needed for Japanese companies?

Perhaps we don’t need to wait for the next 3 years for another revision. We should instead continue to discuss the gaps in corporate governance objectives between Japan and other countries as well as aligning with new issues being discussed globally so we can focus now on truly improving governance.

Chie Mitsui is a Senior Researcher / Data Analyst at Nomura Research Institute, Ltd. She is a graduate of the Tokyo University of Science and has a master’s degree from the Department of Physics, Graduate School of Science. Before joining Nomura Research Institute in 2008, she worked at Jiji Press Ltd. Chie specializes in corporate disclosure information and associated systems, IFRS, ESG and corporate governance and has been publishing articles and reports regarding efficient disclosure information for investors’ & analysts’ activities. She was a member of the IFRS Taxonomy Consultative Group (ITCG) of International Accounting Standard Board from 2014-2020 and is a current member of the Corporate Disclosure Policy Council of the CFA Institute. 

Disclaimer: The views expressed in the blog are those of the author(s) and do not necessarily represent the views of all CRUF participants. To read more about the CRUF’s views on this and other topics, please visit the ‘Our Views’ section of this website.


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