Corporate Governance Reform in Japan
Japan Corporate Governance Forum at the ICGN 2023 Annual Toronto Conference

金融庁
Financial Services Agency, the Japanese Government

21 June 2023, 13:00-13:45
The Quebec Room, Mezzanine Floor

Contents

I.

Action program for Accelerating Corporate Governance Reform

II. Review of the tender offer rule & the large shareholding reporting ruleIII. Sustainability Disclosure-1-

Action Program for Accelerating Corporate Governance Reform The Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance
Code published recommendations regarding "Action Program" as of April 26. The Council will review the
implementation status from time to time and consider whether additional measures are needed.
Action Program for Accelerating Corporate Governance Reform: From Form to SubstanceApproac h to f uture initiative•
It is vital to m ove the f oc us of ref orm f rom f orm to s ubs tanc e in res olving the is sues . T o this end, it is nec es sary tocreate an environm ent that prom otes s elf -m otivated c hanges in the m inds ets of c om panies and inves tors , as well as
to m ake the dialogues between c om panies and inves tors m ore productive and m ore ef fec tive.
•
It is appropriate to exam ine the tim ing of the revis ion of eac h Code in a tim ely m anner bas ed on the s tatus ofprogress f rom the viewpoint of the ef fec tive im plem entation of c orporate governanc e ref orm , not nec es sarily f ollowing
the review cyc le in the pas t years .

１．Issues for seeking sustainable corporate growth andincreased corporate value over the mid- to long-term
Cooperate
appropriately

ListedCompanies
Management
Mid- to long-term
issuesCurrent issues

IssuesProfit-making
and growth
based on costof capital

Stakeholder otherthan shareholders

Effective
Oversight

SupportRisk-taking

Board
Out
side

Nominationcommittee

Initiatives onsustainability,
including humancapital

Out
side

・・・

Remunerationcommittee

Effectiveness of
independent
directors

Specific measuresA) Encouraging the management with an awareness of profitmaking and growth
Enc ourage the m anagem ent with an awarenes s of prof itm ak ing and growth based on the c ost of capital (such as theproper allocation of m anagem ent res ourc es toward ris k tak ing, inc luding a busines s portf olio review and inves tm ents
in hum an c apital, intellec tual properties and R&D)
B) Encouraging the management with an awareness ofsustainability issues
Enc ourage c om panies to tak e ac tions on s us tainability
through public ation of c om panies’ good dis clos ure prac tic es .
Cons ider m eas ures to im prove the divers ity of the board andc ore hum an res ources , s uc h as inc reas ing the perc entage off em ale exec utives (target of 30% or m ore by 2030).
C) Improving the effectiveness of independent directors
Prom ote f urther im provem ent of the ef fectivenes s of
independent directors through c om pilation and publication of
the ac tual status and exam ples of a board, nom inationc om m ittee and rem uneration c om m ittee, and educational
ac tivities to prom ote unders tanding of the roles expected ofindependent directors-2-Action Program (cont.)
Action Program for Accelerating Corporate Governance Reform: From Form to Substance
2. Issues related to dialogue between companies and investors

Proxyadvisors
Listed companies

ReturnProvideRecommendation

Constructive dialogues
based onthe mid- to long- term view

Enhancing thedisclosure
Promoting dialogues
with global investors

Investment

LegalissuesSpecific measuresA) Effective implementation of stewardship activities

Investors（shareholders）
ReturnProm ote the ef forts of as s et m anagers and as s et owners todeal with the is s ues relating to the s tewards hip activities(inc luding alloc ating s uf fic ient resources, providing
inc entives f or s tewardship ac tivities, es tablis hinggovernanc e s truc tures of as s et owners ).

B) Enhancing the disclosure as a basis for dialogue

Asset
manager

Asset
owner

Reques t to dis clos e the s tatus of dialogues and m ake c lears uf fic ient and insuf fic ient c as es of “Explain”.
Cons ider m easures to provide inves tors with the inf orm ation
they need prior to the general s hareholder m eeting and toprom ote tim ely dis clos ure of corporate inf orm ation.

Investment

C) Promoting dialogues with global investors

Effective implementation of
stewardship activities

Prom ote dialogues between com panies and global inves tors
by “vis ualiz ing” c om panies that willingl y and ac tively respondto the expec tations of global inves tors and f urther expand
the c overage of English dis clos ure.

D) Resolving legal issues
Cons ider c larif ic ation of "ac t of m ak ing im portants ugges tions " and "joint holders " under the large s hareholding
reporting rule, trans parenc y of benef ic ial s hareholders , andhow to protect m inority s hareholders in the c as e of a partial
tak eover bid.

E) Resolving market environment issues
Cons ider the dis clos ure and c orporate governance is s ues
with regard to quas i-c ontrolled listed c om panies , f ollow up
on the progres s of reduction of cros s -s hareholdings andc ons ider whether f urther m eas ures are c alled f or.
-3-

Contents

I.

Action program for Accelerating Corporate Governance Reform

II. Review of the tender offer rule & the large shareholding reporting ruleIII. Sustainability Disclosure-4-

Review of the tender offer rule & the large shareholding reporting rule
 At a joint session of the general meeting of Financial System Council and the meeting of Sectional Committee held in March
2023, the following consultation was delivered: in light of securing transparency and fairness of the market andpromoting constructive dialogue between companies and investors, the tender offer rule and the large
shareholding rule should be reviewed.
 A working group was established to consider the following main issues based on recent changes in circumstances onJune 5, 2023.

Recent Changes in Circumstances

Tender offer
rule

Large
shareholding
reportingrule

Beneficial
shareholders
transparency

Main Issues• Increase in cases of unsolicited
M&A through on-market
transactions

 Review of the scope of application of the tender offer
rule (market trades, thresholds)• Diversification of M&A

 Flexibility in tender offer rule

 Measures against coercive tender offers

 Clarification of eligibility to use special reporting Clarification of the scope of joint holders• Increase in passive investment• Expansion of collaborative
engagement• Growing importance ofconstructive dialogues between
companies and investors

 Clarification of treatment of cash-settled equity
derivatives

 Measures to ensure transparency of beneficial
shareholders-5-

Contents

I.

Action program for Accelerating Corporate Governance Reform

II. Review of the tender offer rule & the large shareholding reporting ruleIII. Sustainability Disclosure-6-Summary of Report by the Working Group on Corporate Disclosure of the Financial System Council(published on June 13, 2022)

SustainabilityNew Sustainability
Enhancement Corporate
Governance
Financial information
Annual Report(Matters of Financial Instruments
and Exchange Act’s revision)

Improving efficiency
of disclosure

Q3
Q2

Corporate
Governance(Matters of Cabinet Office Ordinance’s revisions)

Enhancing non-financial
disclosure The Working Group on Corporate Disclosure has discussed enhancing disclosure of non-financial information and improving efficiency of
disclosure in light of recent changes in economic and social circumstances. The summary below is based on the discussions.
GeneralAnnual Securities Reports
 A new section for disclosure of sustainability information will be created(Statutory)•“Governance” and “Risk Management” will be disclosed by all
issuers.
•"Strategy" and "Metrics and Targets" will be disclosed under
Non-financial informationmateriality judgement by an issuer.

Quarterly
Securities
Reports

Quarterly
Earning
Reports(Statutory)(Exchange
Rules)

Human capital "Human resource development policies" and "Policies on improving
workplace environment" will be added to disclosure items.
Diversity
 "Gender pay gap," "Ratio of women in managerial positions," and "Ratio ofmale workers taking childcare leave" will be added to disclosure items.
Functioning of the Board of Directors
 A new section for disclosure of activities of the Board of Directors,
Nomination Committee, and Remuneration Committee will be created.

Revision of Quarterly Disclosure System The quarterly disclosure requirements under the Financial Instruments
and Exchange Act (Q1 and Q3) will be abolished and integrated intoquarterly earning reports based on the Exchange Rules.

Integration

Q1

Quarterly Earning
Reports

Continue discussions on issues for materializing the integration, such as
consideration regarding disclosure obligation, content of disclosure,
enforcement against false statements and review by audit firms.

(Exchange Rules)(Note) In addition to the above, clarification of disclosure requirements for material contracts entered into by companies with other parties, and promotion of disclosure
in English have been also summarized.

-7-

April 2023

Interim Roadmap for sustainability disclosure in Japan

Provisionally translated based on
Presentation Materials of the forth
meeting of the Working Group on
Corporate Disclosure of the
Financial System Council

 In order to enhance the disclosure of sustainability information in Japan, the following initiatives canbe considered while reviewing them as needed in accordance with future changes in circumstances.
Scope

2023

2024

2025

2026 and later

Annual Securities ReportCreate the new section forsustainability information

SSBJ

Japan

SSBJ standards considered to be incorporated into
statutory disclosure

Listed companies

SSBJ’s position be legislated（Companies
subject to FIEA）

Set sustainability disclosure standards in Japan
Will be discussed in accordance with the development of sustainability disclosure standards
and changes in Japan and globally

Third-party Assurance

Discuss sustainability assurance framework, which are- providers, assurance standards/coverage/level, and future regulation regime, etc.

Human resource development (issuers, assurance providers, users)

ISSB（*1）－

IAASB（*1）
IESBA（*1）－

US

Large accelerated filer

Proposed
SEC rule on
March 2022

EU

Accelerated and Nonaccelerated filer
Smaller Reporting
Company
Large public-interest
companies with over 500
employees
Other large companies

Listed SMEs

Directive
CSRD・ESRS Non-EU companies（*5）

S1 and S2 be finalized
in the first half of 2023
Develop new・sustainability assurance standards(Publish the exposure draft in June 2023)
・ethics standards(Publish the exposure draft in 2023)
Scope1,2
required* based on proposed SEC rule issued in
March 2022

Set other standards beyond climate• Assurance standards to be finalized in
Sep 2024• Ethics standards to be finalized in Dec
2024
Scope3 Limited Assurance（Scope1,2）
added
Scope1,2
Scope3 Limited Assurance（Scope1,2）
required
added
Scope1,2
required
LimitedIntroduced Assurance

2026
Reasonable
Assurance
2027
Reasonable
Assurance*Shift to Reasonable Assurance
LimitedIntroduced Assurance*Shift to Reasonable Assurance
Introduced Limited
Assurance
2026
Introduced Limited
Assurance
2028(*1) ISSB: International Sustainability Standards Board, IAASB: International Auditing and Assurance Standards Board, IESBA: International Ethics Standards Board for Accountants (*2) For ISSB and US,
description of proposed rules for climate-related disclosure (*3) For US, Large accelerated filer is an issuer which meets the conditions including an aggregate worldwide market value of $700 million or more,
Accelerated filer is an issuer which meets the conditions including an aggregate worldwide market value of $75 million or more, but less than $700 million, Non-accelerated filer is an issuer which doesn’t meet theconditions for large accelerated filer and accelerated filer, and Smaller Reporting Company is an issuer which meets the conditions including a public float of less than $250. (*4) In CSRD, SMEs are defined as allenterprises with less than 250 employees. (*5) Non-EU companies with substantial turnover in the EU (*6) In UK, the government published the roadmap for greening finance on October 2021. It is indicated in the-8roadmap to incorporate ISSB standards into statutory annual reporting.as the initiatives for one to two years from 2023.

Thank you for your attention.
We hear from you at
jcgf.secretariat@fsa.go.jp

ReferenceI.

Data regarding the progress of corporate governance reform

II. Review of the corporate governance reform
III. Audit reformIV. Review of the tender offer rule & the large shareholding reporting rule
V. Overview of Asset-Income Doubling Plan
VI. Initiatives for International Financial Center
VII. the Code of Conduct for ESG Evaluation and Data Providers- 10 -

Proportion of Independent Directors in the Prime Market[Principle 4.8 of the Corporate Governance Code] Over 90% Prime Market listed companies have 1/3 or more independent directors.
 17% of JPX Nikkei 400 have a majority of independent directors.

【Companies with 1/3 or more Independent Directors】【Companies with Majority Independent Directors】

Source: Excerpts from “Response of Listed Companies regarding Revised Corporate Governance Code (As of July 14, 2022) , Tokyo Stock Exchange, Inc. August 3,2022”, partially processed by FSA- 11 -

Nomination / Remuneration Committees[Supplementary Principle 4.10.1 of the Corporate Governance Code] About 80％ of companies at Prime Market have established statutory or optional Nomination /Remuneration Committees.

【Companies with nomination committee】【Companies with remuneration committee】

Source: Excerpts from “Response of Listed Companies regarding Revised Corporate Governance Code (As of July 14, 2022) , Tokyo Stock Exchange, Inc. August 3,2022”, partially processed by FSA- 12 -

Changes in number of institutions accepting Japan’s Stewardship Code The number of institutions accepting Japan’s Stewardship Code has continued to increase since theintroduction of the Code on February 2014. 324 institutional investors have accepted the Code as ofApril 30,2023.
 297 institutional investors* have accepted 2020 revised version of Japan’s Stewardship Code as ofApril 30,2023.(* 6 Trust Banks,184 Investment managers,24 Insurance Companies,73 Pension Funds, 10 Others)
350
300★The number of institutions accepting Japan’s Stewardship Code■Trust Banks■Investment managers■Pension Funds■Insurance Companies■Others (Service Providers for Institutional Investors, etc.)

250
Introduction of Stewardship Code (Feb 2014)

150
100

Second Revision of Stewardship Code (March 2020)

Revision of Stewardship Code(March 2017)

200

127
4
12
19

7
19

86

0

6

21

7
24
22

7
26
22

7
26

7
26

7
26

22

22

22

7
31
22

7
32

7
7
37

49
23

8

11

12
68

53

58

23

24

24

11

11

11

11

74

77

79

79

24

24

24

24

22

23

178

188

194

194

199

205

205

202

204

6

6

6

6

6

6

6

6

6

21

122

50

7
23

324

6

133

141

147

152

153

153

163

174

7

7

7

7

7

6

6

6

14/05 14/12 15/06 15/12

16/06 16/12 17/06 17/12

18/06 18/12 19/06 19/12 20/06

20/12 21/06 21/12 22/06 22/12

23/04

Source: Prepared by JFSA

- 13 -

International comparison of PBR and ROE
 43% of Japan's major companies (TOPIX 500 constituents) have P/B ratios below 1 and 40% have
ROE below 8%.

- 14 -

Foreign net purchases of Japanese stocks and Nikkei Stock Average At the end of this March, Tokyo Stock Exchange made a request to listed companies to think more
carefully about the significance and the costs of being a publicly traded company.
 Foreign net purchases of Japanese stocks and Nikkei Stock Average has been rising after this April.
【Foreign net purchases of Japanese stocks and Nikkei 225】
(billion JPY)
12,000(JPY)
33,000TSE’s Request

Foreign net purchases of Japanese stocks
Nikkei 225 (right scale)
6,000

31,000029,000-6,00027,000-12,000
2023/12023/22023/3

Source: “Trading by Type of Investors”, Tokyo Stock Exchange, and Bloomberg.

2023/42023/52023/625,000- 15 -

ReferenceI.

Data regarding the progress of corporate governance reform

II. Review of the corporate governance reform
III. Audit reformIV. Review of the tender offer rule & the large shareholding reporting rule
V. Overview of Asset-Income Doubling Plan
VI. Initiatives for International Financial Center
VII. the Code of Conduct for ESG Evaluation and Data Providers- 16 -

Issues for corporate governance reforms
 In order to realize sustainable corporate growth and increased corporate value over the mid- to long-term through corporate
governance reforms, it is vital for management, the board, investors, and various other stakeholders to cooperate appropriately.
 The following is a diagram of cooperation among stakeholders and a summary of issues pointed out in the previous meeting of theCouncil, JCGF, and the survey of institutional investors.

Stewardship CodeCorporate Governance CodeCooperate appropriately

ListedCompanies
Management
Mid- to long-term
issuesCurrent issues

IssuesProfit-making
and growth
based on thecost of capitalProxyadvisors

Stakeholder otherthan shareholders
ReturnEffective
Oversight

ProvideRecommendation

Out
side

Nominationcommittee

Initiatives onsustainability,
including humancapital

Out
side

・・・

Constructive dialogues based on

Assetmanager

Asset
owner

Remunerationcommittee

Investment

Effectiveness of
independent
directors
Accelerating
governance

Goal

Sustainable corporate growthand increased corporate value
over the mid- to long-term

ReturnBoard
the mid- to long- term viewSupportRisk-taking

Investors（shareholders）

Enhancing thedisclosure

Promotingdialogues with
global investors

LegalissuesInvestment

Effective implementation of
stewardship activities

Effective stewardship activities
Improve mid- to long-term
returns- 17 -

Japan Corporate Governance Forum To accelerate and strengthen corporate governance reforms, JFSA established the Japan Corporate Governance
Forum (hereinafter the “JCGF”) to hear a wide range of opinions from stakeholders, including overseas investors.
 In JCGF, while some praised the improvements in corporate governance, the following issues were pointed out: (1)management issues, such as encouraging management with an awareness of profit-making and growth based on
the cost of capital and promoting initiatives relating to sustainability, including human capital; (2) issues related tothe effectiveness of independent directors; and (3) issues related to dialogues between companies and investors.
Prime Minister Kishida’s Remarks at the New York Stock
Exchange (NYSE) September 22, 2022

JCGF event history

One very important policy is corporate governance reform. […]We will accelerate and further strengthen corporate governancereforms in Japan, such as establishing a forum in the near
future to hear from investors from around the world.

・ 1st Forum held on Tuesday, September 27, 2022, with Asian
Corporate Governance Association
・ 2nd Forum held on Monday, October 3, 2022, with International
Corporate Governance Network
・ 3rd Forum held on Thursday, January 12, 2023, with U.S.
investors, etc.

GeneralMain opinions in JCGF

Issues related to
management andeffectiveness of
independent
directors• Corporate governance reform, including corporate mindset, has begun to make substantial progress. Although
there are still some issues, we look forward to further progress.
• The importance of capital efficiency is being recognized, but it is not recognized by all companies. Issues include
accumulation of cash, low ROE, and a large number of companies with PBR below 1.
• Board diversity, including gender perspective, and disclosure on human capital are needed.
• Effectiveness of independent directors, such as strengthening the roles of the nomination / remuneration committee
and ensuring the independence of the board are needed.
• Fiduciary responsibilities in index investment have not been fully fulfilled, and it is necessary to improve the treatment ofinvestment personnel.

Issues related todialogue
betweencompanies andinvestors• It is necessary to enhance disclosure, such as submission of Annual Securities Reports prior to general shareholders
meetings.
• It would be useful to enhance English disclosure and make visible companies with good corporate governance.
• It is necessary to review the legal system from the perspective of promoting and substantiating engagement andprotecting minority shareholders.
• There are concerns that listed subsidiaries may harm the interests of minority shareholders and that there is a large- 18 number of cross-shareholdings.

Survey on Stewardship Activities (1) In order to promote more effective implementation of stewardship activities, JFSA commissioned Mizuho Research &Technologies to conduct a survey of actual stewardship activities by institutional investors, analyze issues, and makerecommendations based on these results. From January to March 2023, the survey, in the form of a questionnaire survey of
136 institutional investors and an interview survey of 16 companies, was conducted.
 As a result of the survey, the following issues were pointed out: (1) Lack of resources (human resources and time) for
engagement, (2) Insufficient behavioral changes and attitudes at investee companies, (3) Room for improvement in processdevelopment (PDCA cycle), (4) Lack of incentives to allocate costs and budgets to activities. In addition, the individual effortsof each asset manager to address these issues were aggregated.
1

Issues pointed out as a result of the survey

Lack of resources(human resources
and time)
for engagement

2
Insufficient
behavioral changes
and attitudes atinvestee companies
Room forimprovement inprocess development(PDCA cycle)

There is a shortage of human resources with the necessary skills and capabilities to conduct effective
stewardship activities at each asset management firm and in the industry as a whole.

In cases where it is difficult to secure and develop sufficient human resources in-house, it is expected that external
knowledge will be utilized through collaboration with other asset managers, including collaborative engagement.
However, the interpretation of "joint holders" under the large shareholding reporting rule is unclear, and theburden of the collaboration is concentrated in some asset managers, so resources may not be sufficiently
supplemented through the collaboration.



As a result of the selection of companies for engagement, small and medium-sized companies tend to be
excluded.

Engagement (dialogue) and exercise of voting rights by asset managers may be perceived by companies asformalistic and may not lead to behavioral changes because companies are not convinced by them.



There is a possibility that in-depth engagement has not been conducted because the interpretation of "act of making
important suggestions" is unclear under the large shareholding reporting rule. reporting system

Asset owners may not have sufficient evaluation and monitoring resources.



Stewardship activities by asset managers may not be appropriately reflected in the selection andcompensation of asset managers.

3

4 Lack of incentives toallocate costs andbudgets to activities- 19 -

Survey on Stewardship Activities (2) Based on the results of the survey, the following recommendations were made: (1) in order to promote more substantial
stewardship activities (i) wide-ranging collaborative efforts among asset managers, (ii) efforts between asset managers andasset owners, (iii) wide-ranging collaborative efforts among asset owners should be promoted; and (2) administrative
authorities should appropriately follow up on these efforts so that all concerned parties can work together to improve theeffective implementation of stewardship activities.
1

Wide-ranging
collaborative
efforts among
asset
managers

Initiatives to Resolve Issues

2

Efforts
betweenasset
managers andasset owners

3
Wide-ranging
collaborative
efforts amongasset owners
4
Follow-up bytheadministrative
authorities

Based on the self-assessment of each asset manager’s individual issues, it is worth considering the establishment of aforum in which asset managers can widely cooperate to exchange views on the appropriateness of the issues
recognized by each asset manager and the effectiveness of efforts to resolve them, and to examine specificmeasures.

As an issue for the whole asset management industry, an appropriate framework should be established to avoid asituation in which some asset managers are forced to bear an excessive burden in terms of collaboration with otherasset managers, including collaborative engagements. It is also expected that the asset management industry as awhole will cooperate in efforts to attract new talent.



Asset managers should report to asset owners on their own issues and efforts to resolve them, as well as
appropriately reflecting evaluations received from asset owners in future efforts.



Asset owners should appropriately evaluate the appropriateness of the asset manager's recognition of issues andthe effectiveness of efforts to resolve them based on the above reports, and appropriately monitor future efforts. It isalso expected that the results of evaluation and monitoring will be reflected in the selection of the asset manager
and the setting of compensation.



It is important for asset owners to have sufficient knowledge and operational resources for assessment and monitoring.

In cases where it is difficult for each asset owner to secure sufficient knowledge and operational resources
independently, it is worth considering taking measures such as evaluating and monitoring asset managers incollaboration with asset owners who have sufficient knowledge and operational resources as needed.

The administrative authorities should appropriately follow up on the effectiveness of each of the above initiatives and, if
necessary, take further measures to promote them.

Regarding the ambiguity of the interpretation of "joint holders" and "important suggestions" under the large
shareholding reporting rule, efforts should be made to resolve the issues. At the same time, the transparency ofbeneficial shareholders should be improved so that companies that are not subject to engagement by asset managers
can themselves ask for dialogue with asset managers.

- 20 -

ReferenceI.

Data regarding the progress of corporate governance reform

II. Review of the corporate governance reform
III. Audit reformIV. Review of the tender offer rule & the large shareholding reporting rule
V. Overview of Asset-Income Doubling Plan
VI. Initiatives for International Financial Center
VII. the Code of Conduct for ESG Evaluation and Data Providers- 21 -

Act to Partially Amend the Certified Public Accountants Act
and the Financial Instruments and Exchange Act Outline

The amendment has been promulgated on
May 19 2022, and will come into effectwithin a period not exceeding one year
from the date of promulgation

The amendments establish a system for certified public accountants (CPAs) that would contribute to ensuring thereliability of audits and to bringing out and cultivating CPAs' abilities, in light of economic and social developments
surrounding audits.

Ensuring the Reliability of Audits

Bringing Out and Cultivating CPAs' Abilities

Registration System for Auditors of Listed Companies

Modification of Restrictions Based on Marital Relationships

Background: A broadening base of audit firms undertaking listed companies' audits

Background: Increase in dual-earner households, growing scale of audit firms(Unit: Cases)

Changes in Auditors of Listed Companies by Scale
Small and Mid-Sized Firms

 The coverage of these restrictions would be narrowed to the partners participating【Article 34-11, paragraph (1) of the CPA Act】
in each audit.
(Under the current regulations, these restrictions cover all partners, regardless of whether or not the partner inquestion is participating in the audit.)Company A

Second-Tier Firms

Audit Firm
Case 1

Officer, etc.

Independent

Big Four Firms

Company A’s Officer Audit Firm Partner= Spouse

Partner
Staff
Company A
Audit Team

(Marital Relationship)(Client)
FYE June 2017

FYE June 2018

FYE June 2019

FYE June 2020

FYE June 2021

A legal framework would be established requiring auditors of listed companies to【Article 34-34-2 and other provisions of the CPA Act】
register.

Eligibility would be verified by the Japanese Institute of Certified Public Accountants【Article 34-34-6 of the CPA Act】
(JICPA) at the time of registration.



A registrant would be required to maintain proper operations and management.
(e.g. Adoption of the Audit Firm Governance Code and enhancement of disclosures)*

Currently: Subject to the restrictions
After Amendment:
Not subject to the restrictions

Company B
Audit Team

< Others >【Article 34-34-14 of the CPA Act】•

Work location would be added as an item to be registered for CPAs in business.

. 【Article 193-2, paragraphs (1) and (2) of the Financial Instruments and Exchange Act】•

The period of practical experience required for eligibility would be revised (from two years to three years).

•

Provisions on disqualification would be introduced for CPAs not engaging in continuing professional education.

•

Accounting education activities by the JICPA would be strengthened.

Listed companies would be required to be audited by registered audit firms.

Monitoring by the Certified Public Accountants andAuditing Oversight Board (CPAAOB)Case 2The CPAAOB's authority for monitoring (e.g. inspections) would be amended.

【Article 49-4, paragraph (2) of the CPA Act】

【Article 17 of the CPA Act】

【Article 3 of the CPA Act】
【Article 21 of the CPA Act】

(Accounting education activities would be added as an item in the JICPA's constitution.)【Article 44, paragraph (1) of the CPA Act】

- 22 -

The Audit Firm Governance Code(Original Code: March 31, 2017, First Revision: March 24, 2023)
 Previously, audit firms applied the Code on a voluntary basis, but audit firms that audit listed companies etc. have been obliged to develop
systems to conduct their business in line with the Code and to disclose enhanced information with the amended Certified Public Accountants
Act that shall take effect in April 2023. JICPA, self-regulatory organization for CPA in Japan, supports small and medium-sized audit firms toachieve these goals.
 The Council of Experts discussed the revision of the Code and compiled a revised version of the Code to achieve the following:
1. Ensuring that the Code is appropriate for the small and medium-sized audit firms in enhancing the audit quality and disclosure
2. Enhancing the disclosure of an audit firm’s relationship to and positioning within the global network
By the “comply or explain” approach, an audit firm should…
Global Network

Group

Contract and By-laws, etc.

Investors, etc.

Audit firm

Shareholders

Auditedcompanysupervision

Management
Board, etc.

evaluation

CEO etc.

Support Accomplish the public interest role.
 Enhance audit quality on a firm-wide basis.
 Develop an organizational culture of openness.

[Principle 2] Management function

Investors

Management
Structure, etc.

[Principle 1] The Role to be Accomplished by an Audit Firm

Supervision and
Evaluation
Structure, etc.
Public Interest
Body, etc.
Independent
third persons

 Clarify the role of management.
 Appoint people who can perform management functions.
 Ensure effective management functions when an audit firm decides
not to establish a management structure.

[Principle 3] Supervision and Evaluation function
 Utilize independent third persons when an audit firm decides not toestablish a structure responsible for supervision and evaluation.
 Clarify the role of the third person and audit firm’s approach to
independence.

evaluation

CEO and CFO,
etc.
Audit Committee,
etc.

[Principle 4] Operation
audit

Audit team Facilitate information sharing between the management and audit
team.
 Develop policies for managing people development and humanresources management.
 Have in-depth dialogue with audited companies.

[Principle 5] Ensuring Transparency
 Ensure the disclosure of the status of the Code’s implementation and enhance the disclosure in terms of quality management, governance, IT
and digitalization, human resources, finances, and international response.
 Enhance the disclosure of its relationship to and positioning within the global network (significance and purpose of participation in the global
network, measures taken to mitigate risks and an overview of contracts, etc.), when an audit firm participates in a global network.
 Have proactive dialogue on an audit firm’s information disclosure with capital market participants and improve management based on internaland external dialogue.
- 23 -

ReferenceI.

Data regarding the progress of corporate governance reform

II. Review of the corporate governance reform
III. Audit reformIV. Review of the tender offer rule & the large shareholding reporting rule
V. Overview of Asset-Income Doubling Plan
VI. Initiatives for International Financial Center
VII. the Code of Conduct for ESG Evaluation and Data Providers- 24 -

Overview of the Tender Offer Rule
 The tender offer rule forces a tender offer for the following transactions, and requires (i) priorinformation disclosure and (ii) equal treatment of shareholders in order to ensure the "transparency
and fairness" of securities transactions that may have an impact on corporate control.
Voting rights ratio after transaction
Over 5%Off-market trades(more than 10 persons
in 60 days)

Off-market trades

Over 1 / 3Majority

2 / 3 or more

5%rule1 / 3 Rule

(A tender
offer isrequired)(A tender offer is required.
Partial tender offer is allowed.)

2 / 3 rule(Partial tender offers
is not allowed)

Exemptions(up to 10 persons
in 60 days)

Market trades

In principle, not subject to rules.

 The main regulations on the implementation of a tender offer are as follows:
Disclosure
regulations

 The offeror must disclose the volume to be purchased, the tender offer price and tender offer period
in advance.
 The target company must disclose the opinion with respect to the tender offer.

Other
regulations

 A minimum tender offer period of 20 business days (a maximum of 60 business days) must be set.
 The tender offer price shall be the same for all shareholders.
 During the tender offer period, the offeror must not purchase shares other than through a tender offer.
 The offeror must not change the terms and conditions to the disadvantage of shareholders.
- 25 -

Issues to consider
 It has been pointed out that (i) transactions in which more than 1 / 3 of the voting rights are
acquired through market trades should also be subject to tender offer rule and (ii) the scopeof the partial tender offer should be limited referring to the European tender offer rules.
Voting rights ratio after transaction
Over 5%Off-market trades(more than 10 persons
in 60 days)

Over 1 / 3Majority

2 / 3 or more

5%rule1 / 3 Rule

(A tender
offer isrequired)(A tender offer is required.
Partial tender offer is allowed.)

Off-market trades

2 / 3 rule(Partial tender offers
is not allowed)

Exemptions(up to 10 persons
in 60 days)

Market trades

In principle, not subject to rules.
Japan

Europe Transactions in which more than 1 / 3 of thevoting rights are acquired through market
trades are not subject to tender offer rule.

 Regardless of the type of transaction, atender offer is required when a certain
threshold is exceeded.

 Partial tender offer is allowed if the ratio ofvoting rights after the tender offer isless than 2 / 3.

 In principle, partial tender offer is not allowed.

 A offeror is required to initiate a tender offer for
acquiring shares which would exceed thethreshold (ex-ante approach).

 A offeror is required to initiate a tender offer after
acquiring shares exceeding the threshold(ex-post approach).

- 26 -

Overview of the large shareholding reporting rule
 The large shareholding reporting rule requires large shareholders to disclose the status of shareholdings in order toimprove the transparency and fairness of the market by promptly providing the information.
 This rule is divided into “general reporting,” which is a basic disclosure type (cf. Regulation 13D in US), and“special reporting,” which allows special measures for institutional investors (cf. Regulation 13G in US).
General Reporting
Obligations of
Large
Shareholders

1. If an investor becomes a large shareholder (more than a 5% stake):- The investor must submit a large shareholding report within five business days of acquiring more than a 5%
in a company.
2. If there are any significant changes such as a 1% or greater increase/decrease in the percentage ofshareholdings following the submission of the large shareholding report :- The investor must submit a change report within five business days of the change.

Special Reporting

Outline of theSpecialReportingRule

The rule allows institutional investors who repeatedly and continuously execute buy/sell transactions of shares in their
daily operations to report under relaxed frequency of and deadline for submissions.
<Details of the relaxation>
Only to submit a "large shareholding report" and "change report" on the pre-registered bi-monthly
reference date and submit the report within five business days of the reference date.
< Eligibility to use special reporting>
1. The investor’s ownership ratio does not exceed 10%.
2. The investor is not committing to the Act of Material Proposal.
3. It is necessary to register the reference date to the authority.

Joint Holders
Outline of
Joint Holders
Rule

A shareholder is required to calculate its shareholding ratio by including the shareholding of a person that
corresponds to any one of the following (“Joint Holder”) .
1. A person that has agreed to obtain or assign shares in cooperation with the shareholder
2. A person that has agreed with the shareholder to jointly exercise voting rights and other shareholder rights.
3. A person that has a special relationship with the shareholder, such as a certain capital relationship or a family
relationship.

- 27 -

Issues to consider
 From the viewpoint of promoting effective engagement with companies by investors, it has been pointed out that thescope of "material proposal" should be limited or clarified.
 It has been pointed out that the scope of "joint holders" should be limited or clarified from the viewpoint ofpromoting collective or collaborative engagement..
General Reporting
Obligations of
Large
Shareholders

1. If an investor becomes a large shareholder (more than a 5% stake):- The investor must submit a large shareholding report within five business days of acquiring more than a 5% in acompany.
2. If there are any significant changes such as a 1% or greater increase/decrease in the percentage of shareholdings
following the submission of the large shareholding report :- The investor must submit a change report within five business days of the change.

Special Reporting

Outline of theSpecialReportingRule

The rule allows institutional investors who repeatedly and continuously execute buy/sell transactions of shares in their
daily operations to report under relaxed frequency of and deadline for submissions.
<Details of the relaxation>
Only to submit a "large shareholding report" and "change report" on the pre-registered bi-monthly reference dateand submit the report within five business days of the reference date.
< Eligibility to use special reporting>
1. The investor’s ownership ratio does not exceed 10%.
2. The investor is not committing to the Act of Material Proposal.
3. It is necessary to register the reference date to the authority.

Joint Holders
Outline of
Joint Holders
Rule

A shareholder is required to calculate its shareholding ratio by including the shareholding of a person that corresponds
to any one of the following (“Joint Holder”) .
1. A person that has agreed to obtain or assign shares in cooperation with the shareholder
2. A person that has agreed with the shareholder to jointly exercise voting rights and other shareholder
rights.
3. A person that has a special relationship with the shareholder, such as a certain capital relationship or a family- 28 relationship.

Transparency of beneficial shareholders
 It has been pointed out that the transparency of beneficial shareholders should be improved
with reference to systems in other countries in order to promote dialogue between companies
and investors.
(*)The term "Beneficial shareholder" here means a person who is not a shareholder on the shareholder register(nominee shareholder) but who has the authority to give instructions on voting right and investment.
Japan As for nominee shareholders, there is a system for companies and other shareholders to identify throughshareholder register or disclosure of major shareholders in annual securities reports.
 On the other hand, as for beneficial shareholders, there is no system for companies or other shareholders
to identify unless they are subject to the large shareholding reporting rule (more than 5%).
 Many companies outsource (at cost) the search for beneficial shareholders to research firm.

Systems in other countries
US An institutional investment manager that exercises investment discretion over $100 million or more in
Section 13(f) securities such as equity securities that trade on a national securities exchange must report its
holdings including the name of the issuer and class, the CUSIP number, the number of shares and the total
market value quarterly on Form 13F with SEC. Form 13F fillings are publicly disclosed on EDGAR database.

UK A public company may give notice to any person whom the company knows or has reasonable cause tobelieve to be interested (or to have been interested in previous 3 years) in the company's voting shares Those who received such notice are required to confirm whether or not it is the case, and if he or she holds
or has held any such interest, to give further information including the number of shares and the identity of
persons interested in the shares in question within such reasonable time as may be specified in the notice.

- 29 -

ReferenceI.

Data regarding the progress of corporate governance reform

II. Review of the corporate governance reform
III. Audit reformIV. Review of the tender offer rule & the large shareholding reporting rule
V. Overview of Asset-Income Doubling Plan
VI. Initiatives for International Financial Center
VII. the Code of Conduct for ESG Evaluation and Data Providers- 30 -

Overview of Asset-Income Doubling Plan (1)Approved by Council of New Form of Capitalism
Realization on November 28, 2022

 Basic Concept Looking at New Form of Capitalism from the viewpoint of the flow of funds, it is important to increase income from financial
assets in addition to earned income by utilizing cash deposits in households for investment.
 If an environment is developed in which it is easy for the middle class to invest in assets with high returns, household income
from financial assets will expand. If household funds become the source of growth investment for companies, corporate value
will increase. If corporate value increases, household income from financial assets will further expand, realizing a "virtuous cycleof growth and asset income".
 In the past, there was an image that investment in stocks and investment trusts was carried out by some wealthy people.
However, with the progress of digitalization, it is possible to greatly expand the asset income of the middle class by developing asystem in which a wide range of people, including those with little investment experience, can participate in asset formation.
 Goal
1. In five years, double the total number of NISA* accounts (from 17 million to 34 million) and the amount of NISA purchases (from28 trillion yen to 56 trillion yen).
2. Thereafter, aim to double household investment (the total balance of stocks, investment trusts, bonds, etc.), and throughachieving these goals, also aim to double asset management income itself as a long-term goal.
*Short for Nippon Individual Savings Account, the small investment tax exemption system for individuals.

 Direction
 Given the importance of making NISA simple, easy to understand and use, the need to widely disseminate the effectiveness ofdiversified long-term deposit investment, and the need to develop an adviser system that is neutral and reliable for consumers,
promote the following seven pillar initiatives in an integrated manner toward doubling asset income.
 Tax measures will be considered in the future tax reform process.

- 31 -

Overview of Asset-Income Doubling Plan (2)Approved by Council of New Form of Capitalism
Realization on November 28, 2022

 Seven Pillars
1: Fundamentally expand and make permanent NISA, which shifts household financial assets from savings to investment
Make the NISA system permanent, and at the same time, make the tax-free holding period indefinite and raise the tax-free
limit.
2: Reform the iDeCo (individual-type Defined Contribution pension plan) system, including raising the minimum age forparticipation
Raise the participation age to 70; reach a conclusion on raising the contribution limit and the age at which people can start
receiving benefits in conjunction with the 2024 fiscal review of public pensions.
3: Create mechanisms to encourage consumers to provide neutral and reliable advice
Establish the public organization to promote financial and economic education, which certifies neutral advisors, and easeregistration requirements for targeted investment advisors.
4: Strengthen asset formation for employers
Encourage companies to make efforts to utilize neutral certified advisors in their work areas.
5: Enhance financial and economic education to instill the importance of stable asset formation
Establish the public organization to promote financial and economic education, and formulate the "Basic Policy" as a national
strategy for comprehensive and systematic promotion of education throughout the country.
6: Realize a global financial center open to the world
Comprehensively promote the revitalization of financial and capital markets, the globalization of financial administration andtaxation systems, the improvement of living conditions and business environment, and the effective dissemination of
information.
7: Ensure Customer-Oriented Business Conduct
Review the "Principles for Customer-Oriented Business Conduct" and develop necessary rules.

- 32 -

ReferenceI.

Data regarding the progress of corporate governance reform

II. Review of the corporate governance reform
III. Audit reformIV. Review of the tender offer rule & the large shareholding reporting rule
V. Overview of Asset-Income Doubling Plan
VI. Initiatives for International Financial Center
VII. the Code of Conduct for ESG Evaluation and Data Providers- 33 -

Japan as an International Financial Center What makes fund managers consider the relocation of their resources?
 Increased focus on business continuity during the pandemic (i.e., multiple offices) Growing geopolitical uncertainties in East Asia Japan’s advantages for attracting more investment to Japan and the Asia include: A solid democracy and the rule of law;
 Safe and secure living and business environment; A large real economy and stock market; and huge household financial assets
Tax and financial regulation
 Financial Market Entry Office for English
consultation and supervisory interaction
 Effective promotion and outreach- Direct outreach to overseas managers- Increased media coverage New easy-entry schemes for overseas
asset managers
 Corporate, inheritance and income tax
reforms
 Review of the remaining tax obstacles

Living and business environment
 Financial start-up support program forfinancial license and visa acquisition
 Preferential immigration treatment for asset
management professionals
 Smooth opening of a bank accountBusiness opportunities Support for startups
 ESG bond market
 Corporate governance reforms
 Investment in human capital by JP firms
 Review of firewall regulations- 34 -

ReferenceI.

Data regarding the progress of corporate governance reform

II. Review of the corporate governance reform
III. Audit reformIV. Review of the tender offer rule & the large shareholding reporting rule
V. Overview of Asset-Income Doubling Plan
VI. Initiatives for International Financial Center
VII. the Code of Conduct for ESG Evaluation and Data Providers- 35 -

the Code of Conduct for ESG Evaluation and Data Providers
 The Technical Committee for ESG Evaluation and Data Providers compiled a draft "Code of Conduct" to ensuretransparency and fairness of ESG evaluation and data providers that evaluate corporate ESG initiatives. The draft report,
published in July 2022, set out recommendations for ESG evaluation and data providers, institutional investors, andcompanies.
 Based on the Technical Committee’s report the FSA published a draft Code of Conduct for public consultation (fromJuly to September 5) and finalized it in December 2022.
note) The FSA calls for voluntary endorsement of the Code from ESG evaluation and data providers that provide services in Japan. The
Code will not be laws or regulations, but are designed to be voluntary on a “comply or explain” basis, where the providers supporting theCode will either comply with the principles and guidelines of the Code, or explain the reasons why they do not comply with a particular
item.). The FSA will publish the status of endorsement regarding evaluation as of June 2023 and that regarding data as of June 2024.







Recommendations for ESG evaluation and data providers (Code of Conduct)
Ensuring Transparency
Disclosing the objective, approach and basic methodology of ESG evaluations.
Human Resource Development
Securing necessary professional human resources as organization and developing
their own professional skills.
Avoiding or managing the risks of conflicts of interest
Identifying their own activities and situations that could undermine theindependence, objectivity, and neutrality of their business, and avoiding or reducing
the risks of, potential conflicts of interest.
Communication With Companies
Clarifying a contact point with a company, allowing it for confirmation and correctionof input data for evaluation, and disclosing these procedures in advance.
Recommendations for institutional investors and companies



Clarifying the basic approach of how they utilize ESG evaluation and data in theirinvestment decisions (investors)
Disclosing ESG information in an easy-to-understand manner and contact point for
responding to inquiries from ESG evaluation and data providers (companies)(*1)developed in light of international reports by IOSCO(*2)Academic and media organizations are not included in the scope- 36 -