Corporate Governance Reform in Japan
Japan Corporate Governance Forumwith ACGA

金融庁
Financial Services Agency, the Japanese Government

May 25, 2023

Summary of discussions at the previous meeting (27 meeting on 16 May 2022) (1)th At the previous meeting of “Council of Experts Concerning the Follow-Up of Japan’s Stewardship Code and Japan’s Corporate
Governance Code” (hereinafter the “Council”), as part of the interim review after the re-revision of the Corporate Governance Code, theFinancial Services Agency (JFSA) organized empirical research and conducted interviews with companies, and discussions were held
based on the results.
 While some respondents supported the direction and effectiveness of corporate governance reforms, others pointed out issues relating
to management, the quality of directors, the quality and scope of engagement, and the legal system.
Interim review: (1) reviewed empirical research on corporate governance, and (2) interviewed 16 listed companies about their corporate
governance-related initiatives and reactions to them.
1

Overviewof empiricalresearch

Not a lot of empirical research covering the period after the implementation of corporate governance reform in Japan has been
conducted as yet, and the results are varied. Therefore, their effect on corporate performance remains to be seen.

Outside directors： A relatively large amount of Pre-reform research indicated that appointment of outside directors boosts market valuation. On theother hand, much Post-reform research indicated that there was no significant relationship with corporate value
Committee：
Establishment of nomination committee and remuneration committee will improve ROA
Capital policy： Reduction of surplus cash by companies with poor capital efficiency boosts market valuation
Cross-shareholding： The profit margin is lower at companies with more cross-shareholdings and the profit margin will improve upon their sale.
Unwinding cross-shareholdings contributes to increased share repurchases and dividends, but does not contribute to increased
R&D, investment in tangible assets, or M&A.
Dialogue：
Engagement with institutional investors leads to better governance and higher share prices.
Shareholders： The high ratio of active investors improves R&D performance in the manufacturing industry, and the high ratio of institutional /foreign investors leads to higher productivity (ROA) and market evaluation.

2

Many companies have commented that "enhanced deliberations by the board have had a positive impact on corporate
management" and "useful suggestions for management have been obtained from dialogue with investors," suggestingthat the direction and effectiveness of reform are widely supported.

Overview ofinterviews
withcompaniesOn the other hand, there were concerns that the Corporate Governance Code's demands on the details of corporate
management may lead to formalistic responses by companies, resulting in counter-productive reforms.



It was noted that a higher quality dialogue should be promoted by addressing the following issues:•
Voting rights are exercised and advised in a mere box-ticking manner by institutional investors and proxyadvisors•
Lack of opportunities for dialogue, particularly at medium-sized and smaller companies•
Difficulty in identifying beneficial shareholders-1-Summary of discussions at the previous meeting (27 meeting on 16 May 2022) (2)thDiscussions: The main opinions expressed in the discussions among experts based on thei n t e r i m r e v i e w a r e a s f o l l o ws :The reforms have improved the formal governance of listed companies, and many companies share theview that it is important to enhance the supervisory function of the board in order to improve
corporate value.

Dialogue between companies and institutional investors is gradually moving toward the larger goal of
making the investment chain work.

There should be a shared recognition that “comply” and “politely explain” are of equal value.

With the “principle-based approach” not firmly established, further branching of the Code should not
be implemented, or the need for further enhancement of the Code is not large.



It is necessary to ensure that an awareness of cost of capital takes root in companies.

Management issues



Human capital costs and R&D costs should be linked to corporate value, such as the company’s
purpose, and communicated with investors to make the value visible.

Improving the quality of
directors, exercising thefunctions of the board of
directors, and the role ofexecution

The biggest obstacle to the substantiation of reform is the quality of those who carry it out (independent
directors and executive officers).



The mission of the President and CEO is to discuss and share the management vision at the board,and once a vision has been put together, explain it to investors, employees and the unions.



The issue for institutional investors is the risk of deterioration in the quality and quantity of engagement incorporate governance, and this issue should be focused on.
Shareholders, investors and related parties should aim to improve the effectiveness of the
Stewardship Code by enhancing corporate value through constructive dialogues with companies, insteadof making judgements in a mere box-ticking manner.

Evaluation of Corporate
Governance Reforms

Responses to formal
compliance by companies
with the Corporate
Governance CodeIssues and expected initiatives in reforms

Issues related toengagement between
companies andinvestors

Institutional issuesThe definitions of "joint holder" and “act of making important suggestions" under the large
shareholding reporting system should be clarified.



It is desirable for a company and other shareholders to identify the beneficial shareholders without
difficulty, so that the management can access institutional investors and other shareholders cantake more appropriate action.
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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-3number of cross-shareholdings.

Main opinions in the Japan Corporate Governance Forum (1)Evaluation of corporate
governance reforms

Several years after the formulation of both codes, at long last, substantial progress has begun on corporate governancereforms, including corporate awareness, and we are confident that Japan's governance reforms will continue.

Improving corporate governance does not mean immediate improvement in business performance. It is necessary totake a long-term view. There is no doubt that it is moving in a good direction.

While we are aware of improvements in corporate governance in Japanese companies, the pace of progress is slow insome areas.

Issues for mid - to long-term enhancement of corporate value

Raising awareness of
cost of capital

Initiatives onsustainability issues,
including humancapitalEffectiveness of
independent directors



Although awareness of the importance of improving ROE and capital efficiency is increasing, this is not always the case.



Factors such as capital efficiency, growth potential, and ROE are very important for investors to include in their portfolios.

Accumulation of cash is a major issue, and investing cash contributes to the Japanese capital market and economy.

Companies with extremely low ROE or PBR below 1 have been able to continue their business without any penalty.



Increased disclosure of human capital is a recent trend, and training employees to improve their skills, disclosure ofinvestment in employees, and targets for the percentage of female directors are particularly important.

The biggest expectation for the Japanese economy going forward is wage increases, which in turn would raise the target
investment yield and the cost of capital for Japanese stocks, leading to higher ROE.



Improving gender diversity of company boards is a pressing issue.



It is important to increase the number of foreign directors in addition to female directors.

The percentage of companies with independent directors accounting for the majority on their boards falls far short ofglobal standards.



While the number of independent directors is increasing, there is also a tendency for them to be sent by the companies
they own shares in.

Directors are obligated to the company, and outside directors working for the CEO are not eligible.

The lack of human resources to serve as directors is an issue, and it is not desirable for the same person to serve
concurrently as an outside director at several companies.



A major problem is that there is no institutional requirement to separate the CEO from the Chair of the board.

It is important for independent directors to serve as chairs of committees and to bring external opinions to committees.

In order to strengthen the roles and responsibilities of nomination/remuneration committees, it is necessary to improve-4transparency to investors.

Main opinions in the Japan Corporate Governance Forum (2)Investor initiative

Issues related to dialogue between companies and investors

Fiduciary responsibility in index investment has not been sufficiently fulfilled.



Low salaries hinder the development of investment personnel. Treatment as investment personnel should be improved.

In order to further provide information to investors, Annual Securities Reports should be submitted 30 days before thegeneral shareholders meeting.

Enhancement of
disclosure

The timing of general shareholders meetings is concentrated over two to three weeks, making it impossible to exercise
voting rights based on analysis of the company and due consideration.

Some companies do not want to meet investors, and top management in particular is not easily accessible.



Visualizing companies with outstanding corporate governance practices is useful for improving investor confidence andPromoting dialogue
with global investors

incentivizing companies.
English disclosure should be further expanded.

The scope of “act of making important suggestions" and "joint holders" under the large shareholdings reporting system isstill unclear, and it is necessary to further clarify the interpretation of it in order to promote and substantiate collaborative
engagement.



A partial takeover bid would be too coercing for minority shareholders. If a takeover bid system similar to that in Europe
is introduced, the benefits for minority shareholders would be great.



It is questionable that a listed subsidiary is justified in terms of the market for minority shareholders and investors. There

Legal and institutional
issuesare cases where the parent company is not aware that it is harming the interests of minority shareholders of thesubsidiary.

Market environment
issues

Cross-shareholdings remain a problem, and even in cases involving business tie-ups, which are often justified on the
grounds of economic benefits, there is a lack of transparency in corporate governance.

In order to determine the success of corporate governance reforms, it is important to create a market environment thatfacilitates M&As. In a market environment that is prone to M&A pressure, management will pay more attention to ROIC,
and there will be pressure to unwind cross-shareholdings.

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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-6-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.

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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-8-

Action Program The Council 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-9-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.
- 10 -

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

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