Japan prepares to shake up corporate code

Japan will push listed companies to allocate at least a third of their board seats to independent directors as the country’s Financial Services Agency prepares a raft of tough revisions to its corporate governance code.

Ryozo Himino, FSA commissioner, told the Financial Times that companies should aim for a majority of non-executives as the regulator attempts to impose fundamental change on the inward-looking world of corporate Japan.

The review will press companies to extend the governance changes that have raised returns on capital and contributed to a 22 per cent rise in the Topix share index since the code was published in March 2015.

Himino said the review of the code will have three pillars: strengthening the role of boards, making core management more diverse and improving disclosure on the environment.

“For example, to improve board effectiveness, we might ask that all prime-listed companies have one-third independent directors, or depending on the company’s circumstances more than half,” he said.

“Some people also want us to go beyond just the proportion and look at the role of independent directors and how they can be more effective.”

Himino took over at the top of Japan’s main financial regulator in July 2020. Regarded as a policy intellectual, he was one of the authors of Japan’s first stewardship code for institutional investors in 2013.

His remarks come just weeks before the FSA must settle on revisions to the corporate governance code — a set of guidelines that have codified a number of basic expectations for Japanese management and smoothed the rise of shareholder activism.

The code was brought in by former prime minister Shinzo Abe as a way to raise returns on capital at Japanese companies that often had little regard for the interests of shareholders. It follows the principle of “comply or explain”, requiring companies to meet the rules or explain why they have not done so.

Himino argued that there had been a “huge change in governance” since the Abe reforms began. “Japanese companies have improved their return on equity and cross-shareholdings have reduced,” he said.

But critics often focus on the lack of sanctions and the code’s inability to change behaviour across a large hinterland of “old Japan”. The review follows scandals such as revelations that the former Nissan chairman Carlos Ghosn was in effect able to set his own pay.

The 2015 code called for greater management diversity, but many companies argue they cannot find suitable executives who are not middle-aged, male, Japanese and lifetime employees of the company, said Himino. Rather than insisting that listed companies find such people, he said, the new code will push to train them.

“The point is to say please set your own target for raising diversity in terms of gender, nationality, mid-career employment or whatever else, and then publish your progress towards it,” he said.

As Japan’s top financial regulator, Himino is also responsible for the success or failure of Tokyo’s effort to lure more bankers, asset managers and investment capital from Hong Kong.

“I’ve spoken with lots of foreign financiers in Tokyo and they usually have three complaints: regulation, tax and immigration,” he said. The FSA is increasing the services it provides in English and the government is tackling some extremes of the tax system.

From April, Himino said, foreign residents would no longer be liable to Japanese inheritance tax at rates of up to 55 per cent on their worldwide assets if they die in Japan. “Of course we can’t just reduce all the tax rates to 18 per cent, but we’re responding to all of the areas where there are strong opinions.”

Tokyo’s strength as a financial centre is not just about winning international business, he said — it is crucial for Japan’s ageing population to earn an adequate return on its savings.