May 7, 2021
Institutional Investors Collective Engagement Forum

Comments on the “Corporate Governance Code” (Draft Revision)

We submitted the following comments to the Tokyo Stock Exchange in response to its request for
public comments on the draft revision of Japan’s Corporate Governance Code.
Introduction
We understand that the draft revision of Japan’s Corporate Governance Code (hereinafter the “CGCode”) announced on April 8, 2021 includes a number of revisions that will contribute to theenhancement of corporate value in many aspects, based on changes in the international capital
markets in recent years. These revisions aim, among others, to strengthen corporate initiatives forsustainability and their disclosure, to strengthen the functions of the board, to ensure diversity
among core human resources of companies, and to promote constructive dialogue with shareholders
in tandem with the revision of the Guidelines for Investor and Company Engagement. As a forum for
institutional investors that engage in dialogue with companies, we support the goals that the CG Codeintends to achieve.
In particular, the revision requires a higher governance discipline for the Prime Market, which is a
new market category scheduled to start operation in April 2022 comprised of leading and first-class
Japanese companies, aiming to make it an attractive market from an international perspective. In thisrespect, we believe that investors also have a high hope for the revision.
As above, we support the proposed draft revision of the CG Code as a whole. At the same time, we
make the following comments to express institutional investors’ opinions and requests to further
enhance corporate governance:[Regarding Supplementary Principle 1.1.1] We request that the following paragraphs be added:“…should consider and disclose the need for shareholder dialogue and other measures. In additions,the board of a company that has a controlling shareholder should conduct the same analysis on thevotes cast against a proposal by general (minority) shareholders excluding shares held by thecontrolling shareholder and should disclose whether there is a need for such measures.”<Reason> Most companies claim that they comply with this principle, but few companies explain toshareholders about specific contents of their analysis or policies on their measures. We request that“disclosure” be added to the principle because we believe that it is an important first step of dialogue1with shareholders to disclose and explain results of analysis on proposals voted against by many
shareholders in CG Report or elsewhere.
In addition, it is extremely important from the governance perspective for a company that has acontrolling shareholder to actively engage in dialogue with general (minority) shareholders based on
voting results of general (minority) shareholders other than controlling shareholders.
[Regarding Supplementary Principle 1.2.4] “Bearing in mind the number of institutional and foreignshareholders, companies should take steps for the creation of an infrastructure allowing electronic
voting, including the use of the Electronic Voting Platform, and the provision of English translationsof the convening notices of general shareholder meeting…”<Reason> We support the proposed revision to include a specific reference to the promotion of theuse of the Electronic Voting Platform by companies to be listed on the Prime Market. However, aslong as there are some listed companies not participating in the Electronic Voting Platform,
institutional investors will continue to have to handle their administrative work in two different
manners. Therefore, we expect that the Electronic Voting Platform will be made available for use forall listed companies. For this reason, we recommend that the phrase “Bearing in mind the number of
institutional and foreign shareholders” be deleted from this principle to clearly indicate that all listedcompanies should strive to make electronic voting available to investors. In addition, we recommendthat the provision of this principle about the English translation of convocation notices either bemoved to Supplementary Principle 3.1.2 or be a separate principle as Supplementary Principle 1.2.5(and the current 1.2.5 be changed to 1.2.6).
[Regarding Principle 1.4 Cross-Shareholdings] We request that “When the board has approved a plan
to reduce cross-shareholdings, companies should promptly disclose it.” be added to this principle.
We also request that the phrase “benefits and” be deleted from “…whether the purpose isappropriate and whether the benefits and risks from each holding…” and “it is inappropriate torequire shareholdings as a condition for a commercial relationship” be added to this principle.
<Reason> As companies’ understanding and efforts on cross-shareholdings have been quite
insufficient, we believe that it is necessary to revise the CG Code in a manner to further clarify its
position on this matter.
First, given the current situation in which there are only a very few companies that disclose specificplans to reduce cross-shareholdings, investors would be able to ascertain the attitude of eachcompany if it discloses a specific plans to reduce cross-shareholdings when the plan is approved bythe board. Investors would also be able to surmise that a company without such disclosure has notformulated a specific plan and measures to reduce cross-shareholdings. This is expected to promotedialogue between companies and investors.
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Next, regarding the holding purpose, Supplementary Principle 1.4.1 states that “…should not imply
a possible reduction of business transactions when cross-shareholders indicate their intention to sell
their shares.” Therefore, such a wording as “maintaining and strengthening the commercialrelationship” presented by many companies as a reason for cross-holdings, i.e., the reason thatshareholdings would strengthen the commercial relationship is clearly inconsistent with the spirit ofSupplementary Principle 1.4.1. This should be expressly stated in Principle 1.4. Furthermore, as thenotion that cross-shareholdings bring some “benefits” beyond ordinary shareholder rights
contradicts the principle of “securing equal treatment of shareholders” set forth in General Principle
1, the use of the word “benefits” itself is inappropriate.
[Regarding Supplementary Principle 4.8.3] We request that it be modified as follows: “…appoint atleast one-third of their directors (the majority of directors if listed on the Prime Market).”<Reason> We support the idea that the CG Code requires higher discipline if both the parent company
and its subsidiary are listed or if there is a controlling shareholder (holding 30% or more). There is no
reason why the discipline applicable to a company with a controlling shareholder should distinguishbetween the Prime Market and the Standard Market because the controlling shareholder is often
listed on the Prime Market. Therefore, we request that this Supplementary Principle be modified torequire that the percentage of outside directors be more than 50% regardless of the market on which
the company is listed.
[Regarding Supplementary Principle 4.11.1] We request that this Supplementary Principle bemodified to “… When doing so, it is desirable for the board to include, for example, directors withmanagement experience in other companies, those with knowledge of capital markets, and thosewith knowledge of latest technologies among independent directors.”<Reason> We support the efforts to increase diversity among board members. In this context, it
somewhat lacks a healthy balance to stipulate, in particular, that “director(s) with management
experience in other companies should be included.” We understand that the purpose of the CG Codeis to enhance corporate governance through dialogue with shareholders and other stakeholders andthereby to promote corporate management based on cost of capital. However, given that there werecorporate executives in the past in Japan who did not consider the interest of shareholders and otherstakeholders adequately, only stating inclusion of “management experience in other companies” as
the only requirement could lead to such results that are not intended by the CG Code. Therefore, as
shown above, we propose to add other requirements that are particularly expected as skills of future
director candidates.
[Regarding Supplementary Principle 5.1.2] In view of Japan’s Stewardship Code Guidance 4-5 stating3

that “it would be beneficial for them to engage with investee companies in collaboration with otherinstitutional investors (collaborative engagement) as necessary,” we propose that “collaborativedialogue” be added to Supplementary Principle 5.1.2 iii) so that it is changed to “Measures topromote opportunities for dialogue aside from individual meetings and collaborative dialogue (e.g.,general investor meetings and other IR activities)” in order to indicate that collaborative dialogue
with shareholders is a beneficial means of dialogue also in the CG Code.
[Regarding Relationship between the CG Code and the Engagement Guidelines]
The proposed revision includes not only revisions to the CG Code, but also important revisions tothe Guidelines for Investor and Company Engagement (hereinafter the “Engagement Guidelines”).
The Engagement Guidelines “are intended to be a supplemental document to the Stewardship Codeand the Corporate Governance Code,” and companies “are expected to consider the contents of theGuidelines” when they comply with a principle of the CG Code.
However, there is a risk that many companies and investors will not pay much attention to therevision of the Engagement Guidelines. Therefore, we request that the authorities provide suchdisclosure, explanation, and public relations that help them to understand the relationship between
the CG Code and the Engagement Guidelines and that the items stipulated in the Engagement
Guidelines are also what listed companies are expected to achieve.
[Regarding Disclosure Rules for CG Report]
Sufficient information disclosure is a prerequisite for dialogue between a company and its
shareholders and investors. Investors want companies to disclose and explain how they are
implementing specifically the governance principles with which they claim to comply. On the otherhand, as the items that should be disclosed in CG Report are exhaustively prescribed, most companies
currently understand that it suffices to disclose these prescribed items.
For this reason, we request that the Tokyo Stock Exchange send a message to the effect that “thereis no problem if a company discloses and explains its efforts regarding not only the prescribed 11
items, but also other principles, and doing so is rather desirable in promoting dialogue with investors.”[Regarding the scope of Material Proposals (Act of making important proposal) by a shareholder]
Lastly, for the effective instillation of the revised CG Code, the enhancement of dialogue between
companies and investors would be indispensable. In engaging in such dialogue, large Japanese andforeign institutional investors that engage in collaborative dialogue and passive investment, inparticular, have raised strong concerns in relation to the large shareholding reporting system that thescope of Material Proposal is unclear. If an investor makes a direct proposal for improvement to a4

company whose governance awareness is insufficient, there is a risk that such a proposal will beregarded as a Material Proposal. As long as such a risk remains, investors’ proposals would only resultin ambiguous suggestions, which would limit the effectiveness of engagement.
We request that the scope of Material Proposal be clarified by stipulating, for example, that when
an investor who clearly does not intend to acquire a controlling interest in a company, such as passive
investor, refers to matters generally expected by investors from investees (e.g., better capitalefficiency and improvement of corporate governance structure) in the course of dialogue, such areference would not fall under Material Proposal. We strongly request that this point be taken into
consideration.

Contact information:
Institutional Investors Collective Engagement Forum
Directors in charge: Yuki Kimura, Chairman; Naomi Yamazaki, Administration Manager; and Ryusuke
Ohori and Hiromitsu Kamata, Executive Director
Address: Tokyo Entre Salon, Shinmaki-chou Building Annex 1, 3-2-14, Nihonbashi, Chuo-ku,
Tokyo 103-0027 JAPANE-mail: info@iicef.jp

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