May 6, 2021

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Japan set to shake up corporate code

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

FSA commissioner Ryozo Himino told the Financial Times companies should target a majority of non-executives as the regulator tries to force a fundamental change on the world turned inward Japanese companies.

The review will prompt companies to extend governance changes that have increased return on capital and contributed to a 22% increase in the Topix equity index since the code’s publication in March 2015.

Himino said the code review will have three pillars: strengthening the role of boards, diversifying grassroots management, and improving environmental disclosure.

“For example, to improve the effectiveness of the board, we could ask that all publicly traded companies have one third of independent directors, or depending on the circumstances of the company more than half,” he said.

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

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

His remarks come just weeks before the FSA voted on revisions to the corporate governance code – a set of guidelines that codified a number of basic expectations for Japanese management and smoothed out the rising shareholder activism.

The code was introduced by former Prime Minister Shinzo Abe as a way to increase returns on capital in Japanese companies that often had little regard for the interests of shareholders. It follows the “comply or explain” principle, requiring companies to follow the rules or explain why they did not.

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-holdings have declined,” he said.

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

The 2015 code called for more management diversity, but many companies say they cannot find suitable executives who are not middle-aged, male, Japanese, and lifelong employees of the company. business, Himino said. Rather than insist 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 goal to increase diversity in terms of gender, nationality, mid-career job or whatever, and then post your progress in that. meaning, ”he said.

As Japan’s main financial regulator, Himino is also responsible for the success or failure of Tokyo’s efforts to attract more bankers, Hong Kong asset managers and private equity investors.

“I have spoken with a lot of foreign financiers in Tokyo and they usually have three complaints: regulation, taxation 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 subject to Japanese inheritance tax at rates of up to 55% on their worldwide assets if they die in Japan. “Of course, we can’t just reduce all tax rates to 18%, but we respond to all areas where opinions are strong.”

Tokyo’s strength as a financial center isn’t just about winning international business, he said – it’s crucial for Japan’s aging population to get an adequate return on its savings.



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