Corporate Governance Reform in Japan
Japan Corporate Governance Forum

金融庁
Financial Services Agency, the Japanese Government

Speech by Prime Minister KISHIDA Fumio at the New York Stock Exchange (1) (September 22, 2022)
 Corporate Governance Reform

One very important policy is corporate governance reform.
As a result of numerous reforms Japan has made in the last decade, the behavior of Japanesecompanies has significantly changed.
ROE ratios have soared, and almost all companies now have independent outside directors. We
also expect more companies to appoint women and foreign talent to their boards.
We have witnessed more companies undertaking vast corporate reforms not seen in the past, suchas divesting non-core businesses and pivoting to new fields.
We will accelerate and further strengthen corporate governance reforms in Japan, such as
establishing a forum in the near future to hear from investors from around the world .
It has been three decades since the burst of the "bubble" economy in Japan. Since then, Japan
has cut costs by tackling excessive debt, excessive investments and excessive capital. We haveachieved a slim, cost-sensitive economy as a result. But clearly more is required.
We face the challenge of investing in the future and developing an economy that consistently
creates new value.

Source: Official Website of the Prime Minister of Japan and His Cabinet at:https://japan.kantei.go.jp/101_kishida/statement/202209/_00009.html-1-Speech by Prime Minister KISHIDA Fumio at the New York Stock Exchange (2) (September 22, 2022)
 Human Capital
Let me share Japan’s five priorities.
First is to invest in people.
Digitalization and greening have drastically changed the economy. We know that a source of a great deal of added value will b e
intangible, not tangible, assets. And in particular, it will be human capital.
So, we will advance a society where human capital is central.
Labor market reform is my priority. Japanese labor management will be updated, from a seniority -based, lifelong employment
system into a new Japanese system where job-based pay is located at its core, through the cooperation between the governmentand business community.
This will facilitate labor mobility and give birth to a cycle in which paying higher wages attracts highly skilled personnel, therebyincreasing labor productivity and level of salaries.
We will further bolster our support for the reskilling of workers in digital and other fields, while encouraging labor mobili ty.
Japan’s future depends upon the vitality that women bring to our economy. "Women empowerment" is crucial. There has been aclear shift in the attitudes of the younger generation. Over the past 10 years, the percentage of full -time female employees under
the age of 35 has increased by 10% or by 0.6 million -even though the population of this generation decreased by 1.2 million ove r
the same period.
We are determined to clear the obstacles that hinder women’s advancement because women must be at the core of the Japaneseeconomy.
We need women to pursue their careers and have families. There is no reason we cannot pursue both and help the declining
birthrate. In April of next year, we will establish the Child and Family Affairs Agency to consolidate child -rearing policies. This is alandmark policy that aims to meet the structural challenges of our population decline.
Reforming the wage system, investing in people, and women empowerment. All of these efforts will be promoted in atransparent manner as we establish disclosure protocols for human capital, and we will lead the international rule -making
process as well.
Source: Official Website of the Prime Minister of Japan and His Cabinet at:https://japan.kantei.go.jp/101_kishida/statement/202209/_00009.html-2-Corporate Governance Reform: Future issues and Initiatives
 With the aim of promoting the sustainable growth of companies and their medium- to long-term
increase in value, it is required to proceed with initiatives toward the substance of corporate
governance reform.

Assumed Initiatives

 Enforce the disclosure form of non-financial information, including human capital investment
and climate change.
 Examine whether corporate governance reform has contributed to enhancing corporate
value, and further improve the substance.
 Enhance the quality of stewardship activities and stewardship report of institutionalinvestors.
 Examine the effectiveness of institutions’ incorporation of the revised Code. (Applyingthe PDCA cycle.) Review the large shareholding reporting system to facilitate dialogue between companies
and investors.
 Clarify the range of (i) “joint holder” and (ii) an "act of making important suggestions.”

Set up a Forum to hear a wide range of opinions from stakeholders, including global investors, andcompile an Action Program to take action on corporate governance reform in terms of substance.
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Overview of the interviews with companies
on corporate governance reforms

Material of The Council of Experts Concerning
the Follow-up of Japan’s Stewardship Code andJapan’s Corporate Governance Code (thetwenty-seventh council on May 16, 2022)

 FSA, with the cooperation of Keidanren (Japan Business Federation), conducted a series ofinterviews with companies in order to look into their corporate governance initiatives and theirviews.
[Interviewed companies (in alphabetical order)]Astellas Pharma, Ebara, FP Corporation, Omron, Kao, Sun Frontier Fudousan, Shin-Etsu Chemical, Suzuki Motor, Sumitomo Electric Industries, TDK, Nitori HD, Fujitsu, Mitsui & Co.,
Mitsui Fudosan, Yamaha, Yokogawa

Key Takeaways•Evaluation of theCorporate
Governance Reforms

Most companies, including the management side, said that enhanced deliberations by the board of directors anddeepened discussions on medium- to long-term business strategies had a positive impact on their business, and thatengagement with investors gives useful suggestions to the management, suggesting that the direction andeffectiveness of corporate governance reforms are widely supported.

• Given the pressure to comply on the companies' side, if the Corporate Governance Code refers to even details ofbusinesses, it may lead to formalistic responses by companies, resulting in an insubstantial reforms.
• High-quality engagement should be promoted by addressing issues such as exercise of voting rights based on acheck-the-box by institutional investors, the lack of opportunities for engagement at medium-sized and smaller
companies, and the difficulty for companies to identify beneficial owners.

Key Issues

Engagement

Opinions of Companies

Companies

Corporate
Governance

Board of Directors

Board
EffectivenessNomination
Committee

Secretariat

Investors•

Corporate governance reforms help to increase corporate value in the long-run, and the directionof the Corporate Governance Code that aims to improve corporate value is highly appreciated .

•By original and ingenious initiatives, such as methods of explanations provided by the management
to the Board, the Board of Directors' deliberations were enhanced, and valuable suggestions andadvice were provided by outside directors, which led to decisive decision -making.

•Medium - to long-term management strategy was discussed at the Board of Directors, and authority
was transferred to executives. The monitoring of management through progress report increased thespeed of decision-making and enabled management in line with the medium - to long-term strategy.

ManagementAppointment•By gaining trust from within the company, a nomination committee can endow the nominatedmanagement team with strong leadership.

Evaluation ofthe Board
Effectiveness•Applying a PDCA cycle of corporate governance reforms that hinges upon the evaluation of theboard’s effectiveness can substantiate the functions of the board.

•Engagement by the president, the chairman of the board and outside directors actively andcontinuously with investors who see the company on a medium to long horizon and give them
helpful suggestions.

Relation withthe Management

Engagement-4-

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 efficiencyof disclosure

Q3

Quarterly
Securities
Reports

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 ofdisclosure 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 allissuers.
•"Strategy" and "Metrics and Targets" will be disclosed under
Non-financial informationmateriality judgement by an issuer.

QuarterlyEarning
Reports(ExchangeRules)
Integration(Statutory)

Q2
Q1

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.
Quarterly EarningReports

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.

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

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