Provisional translation

Revisions of Japan’s Corporate Governance Code andGuidelines for Investor and Company Engagement

The Council of Experts Concerning the Follow-up of Japan’s Stewardship Codeand Japan’s Corporate Governance Code
April 6, 2021

Ⅰ. Introduction

Under the changing environments surrounding business firms triggerd by the
COVID-19 pandemic, all companies must recognize challenges and get aheadof the changes for their future growth. To do so, it is important for them topromptly address corporate governance issues, such as to make the board
more effective, promote diversity in their core human resources, and pursue
sustainability toward their continuous growth and increase of corporate value
over the mid- to long-term.
In April 2022, the Tokyo Stock Exchange will shift to a new market
segmentation. The Prime Market is expected to be a market attractive to both
domestic and global investors, and global investors will be given goodinvestment opportunities in Japan there. Therefore, it is important for companies
listed on the Prime Market to advance efforts toward a higher level of corporate
governance. It is also important for companies listed on other markets to makeefforts to improve their corporate governance to achieve sustainable growth andincrease corporate value over the mid- to long-term with the characteristics ofeach market in consideration.
In order to encourage companies to advance a higher level of governance, in
December 2020, the Council of Experts Concerning the Follow-up of Japan’s
Stewardship Code and Japan’s Corporate Governance Code (the “Council”)
published Opinion Statement No.5 “Board Effectiveness and Ensuring Diversity
in the Core Human Resources in Companies for Post-COVID Transformation ofCompanies” (the “Opinion Statement No.5”). After this publication, the Council
discussed and considered issues, such as sustainability, group governance andensuring confidence of audits. Subsequently, the Council recommended
proposals to revise Japan’s Corporate Governance Code (the “Code”) under the“comply or explain” approach, adding to the contents of Opinion Statement (5)(Please see Appendix 1 for details). In order to further encourage constructive
dialogue between companies and institutional investors, the Council has also
proposed revisions to the Guidelines for Investor and Company Engagement(the “Guidelines”) (Please see Appendix 2 for details; hereinafter referred to as“Revision Drafts” together with the revision draft of the Code.).
Ⅱ. Recommended Revisions to the Code and the Guidelines

The Revision Drafts include issues such as, group governance, ensuringconfidence of audits, and the general shareholder meeting, as well as board
independence, ensuring diversity in the company's core human resources andmanaging sustainability related factors. The basic recommendations on the
Revision Drafts are as follows.
1. Ensuring Board Independence1

As described in Opinion Statement No.5, under non-linear changes in thebusiness environment, the board is required to support and effectively oversee
management's prompt and decisive risk-taking as well as making important
decisions.
To do so, it is important for companies listed on the Prime Market, where
investors could expect to find good investment opportunities in Japan, to appoint
enough independent directors to account for at least one-third of the board.
Further, if they consider necessary in light of their business environment andbusiness characteristics, etc. companies should consider to appoint enoughindependent directors to form the majority of the board.
In addition, it is important to ensure that the board as a whole has the skills
necessary in light of the mid- to long-term company direction and businessstrategy. To do so, it is important for companies to identify the skills, etc. that theboard should have in light of their business strategies, and then disclose the
combination of skills, etc. that each inside and outside director possesses in an
appropriate form according to the business environment and businesscharacteristics, etc. for example in the form of a so-called "skills matrix." It isalso crucial to include independent directors with management experience* inother companies because independent directors are expected to play a more
important role in ensuring that companies anticipate changes in the businessenvironment and reflect them in their business strategies. It is important thatthese skills, etc. are actually utilized in the duties of each director for board
effectiveness.
In addition, it is important to appoint individuals who are capable of fulfilling
the role expected of them besides satisfying independence criteria. It is also
important for independent directors to be well aware of the expected roles andfulfill them.
In addition, as the CEO plays a central role in management, the appointment
and dismissal of the CEO is the most important strategic decision for a company.
Based on the point, the existing version of the Code requires companies toestablish independent advisory committees, such as a nomination committee
and a remuneration committee. However, despite the fact that ensuring theindependence of the committees is one of the important factors for it to fulfill its
expected functions, it has been pointed out that it may not be sufficient atpresent, and that it is important to further enhance its independence incomparison with other countries.
Accordingly, from the perspective of making the board more effective, it isimportant for companies listed on the Prime Market to establish a nominationcommittee and a remuneration committee that are comprised of a majority of
independent directors.
In addition, it is desirable that the nomination committee is involved in thenomination and succession planning of - not only the CEO- but also directors,
and the remuneration committee should ensure the development of a*

These directors does not mean only those with the experience of CEO, etc.

2remuneration system that is consistent with business strategy. However, it has
been pointed out that, in many cases, disclosure is insufficient on what roles
and powers such committees have been given and what activities they perform.
In light of these comments, it is important to clarify the mandates and powers of
the nomination committee and the remuneration committee to improve thetransparency of the board related to nomination and remuneration.
With regard to CEOs and directors, it is important not only that appropriate
processes are in place at the time of nomination but also that the effectivenessof the board, individual directors and board committees are periodicallyevaluated.
Further, from the viewpoint of absorbing management analysis and opinionsfrom the perspective of capital providers and stimulating a healthy
entrepreneurial spirit for sustainable growth, it is important for directors including
independent directors to understand and recognize the perspective of
institutional investors through dialogue. However, it has been pointed out that
constructive dialogue with independent directors is not sufficiently advanced. Inorder to ensure appropriate response to any shareholder concerns by attendeesof dialogue, it is important to take appropriate measures, such as appointing alead independent director.
Furthermore, it is important to ensure the effectiveness of overseeing
management by the board through the appointment of an independent director
as the chairperson, if it is considered to be necessary in light of a company’s
governance structure. It is expected that this point will be further consideredthrough dialogue with institutional investors.
2. Promoting Diversity in Core Human Resources

For a company to lead the non-linear changes brought about by the COVID19 pandemic and achieve new growth, a diversity of perspectives and values isrequired, not only in the board, but also in management. Besides fullyrecognizing the business environment surrounding companies in Japan, it isvery important to build a system to ensure diversity in terms of gender,internationality, work experience, age, etc. at the middle managerial level, which
supports the top management and board, and to ensure that these core humanresources gain experience and eventually are appointed as the top
management and directors. The board is expected to promote and oversee such
efforts in a proactive manner in order to ensure diversity.
Accordingly, it is important that companies should present their policies andvoluntary measurable goals for ensuring diversity in core human resources,
such as the promotion of women, foreign nationals and midcareer hires to
middle managerial positions, as well as disclosing their status. Companies
should also present their policies for human resource development and internal
environment development to ensure diversity, as well as the status of theirimplementation. It is also important that companies disclose their policies for3human resource development and internal environment development to ensure
diversity, as well as the status of their implementation.
3. Attention to Sustainability and ESG

With the aim of increasing corporate value over the mid- to long-term, it is
becoming increasingly important to positively and proactively address factors
related to sustainability (including environmental, social and governancefactors), not only as a risk, but also as earning opportunities. In terms ofsustainability, there has been a growing focus on environmental elements, andrecently the importance of social elements, such as investment in human capital,
has also been emphasized. It has also been pointed out that it is desirable toadvance more effective efforts with regard to intellectual properties in addition
to investment in human capital from the perspective of strengthening
international competitiveness.
Based on these considerations, it is required for the Board to develop a basic
policy for the company’s sustainability initiatives in terms of increasing corporate
value over the mid- to long-term, and to consider and promote such initiatives
on a company-wide basis, including the development of an oversight systemsuch as a committee on sustainability and engagement with stakeholders. Somesustainability related issues are common to all companies, while others may
differ depending on the circumstances of each company. It is important for eachcompany to accurately understand its own situation and decide on sustainability
elements of most relevance to be addressed on a case-by-case basis, in orderto ensure a substantive rather than a formulaic response to sustainability.
In addition, and in recognition that investments in human capital and thecreation of intellectual property have a significant impact on corporate value
when allocating management resources for sustainable corporate growth, it isnecessary to effectively supervise the allocation of management resources suchas investments in human capital and intellectual property to ensure theircontribution to company’s sustainable growth.
Further, from the perspective of promoting constructive engagement onsustainability between investors and companies, it is important to disclose
information on sustainability. In particular, the Taskforce for Climate-related
Financial Disclosures (TCFD) recommendations is currently an internationallywell-established disclosure framework for climate change. In addition, the IFRSFoundation, the body that sets International Financial Reporting Standards(IFRS), is in the process of developing a unified disclosure framework forsustainability, including climate change, while taking into accout the TCFD
recommendations.
Japan is expected to actively participate in this initiative to develop a
comparable and consistent disclosure framework for climate change. When the
IFRS Foundation develops a unified framework for sustainability disclosure
based on the TCFD recommendations, it is expected that the framework will beequivalent to the TCFD recommendations. Also, it will be important to provide
4specific information on investments in human capital and intellectual property toincrease corporate value over the mid- to long- term.
With respect to such investments toward the future, it is essential to ensure
the implementation of sustainable management and investment strategies by
securing sufficient operating cash flow to support the execution of investment
strategies.
4. Other Individual Items(1) Group GovernanceWith regard to group governance, it has been pointed out that it is important
to develop governance systems to protect minority shareholders of listed
subsidiaries, such as by strengthening their governance systems, in light ofrecent discussions on the nature of group-based magement.
A controlling shareholder should respect the interests of the company and thecommon interests of shareholders, and should not treat minority shareholders
unfairly. Accordingly, in companies with a controlling shareholder, it is required
to protect minority shareholders through measures such as the realization of ahigher level of independence in the composition of the board, or deliberations
and reviews by an independent special committee for material transactions andactions that conflict with the interests of controlling shareholders and minority
shareholders (e.g., direct transactions between a parent company and its
subsidiary, business transfers or business adjustments between a parent
company and its subsidiary, and a parent company squeezing out minority
shareholders). It is also important for companies to take measures in order toensure the protection of the common interests of the company andindependence of the board from the controlling shareholder in terms of the ratio
of independent directors and the mechanism for their appointment. In addition,
it is desirable that not only companies with controlling shareholders but also
companies that have a major shareholder having a similar level of control(quasi-controlling shareholders) will take measures based on the Revision
Drafts.
(2) Ensuring Confidence in Audits, Internal Control and Risk Management

Ensuring confidence in audits is important as a basis for achieving mid- tolong-term increase in corporate value. In particular, in “Recommended
Directions for Further Promotion of Corporate Governance Reform” (Opinion
Statement No. 4 of the Council of Experts Concerning the Follow-up of Japan’s
Stewardship Code and Japan’s Corporate Governance Code” published in April2019), it is pointed out that the internal audit department is under the control
and supervision of the CEO in most companies, and that the oversight functionof the department has not been fully performed in cases where senior
management has been involved in dishonest practices.
In light of these points, it is important for companies to ensure coordination
between the internal audit department, directors and kansayaku by establishing5

processes where the internal audit department directly reports to the board,
audit committees and the kansayaku board. In addition, in order to ensure theeffectiveness of the operation of the whistle-blowing system, it is also importantthat the disclosure and explanation of the whistleblowing system and the resultsof operation related to whistle-blowing are easy to understand in order to ensure
the effectiveness of the whistle-blowing system.
With regard to internal control and risk management, the board is required todevelop an appropriate internal control and risk management system. In thiscontext, there are comments to the importance of the perspective that the board
should appropriately determine and assess the risks assumed by the company
from a viewpoint of increasing corporate value. There are also comments to theimportance of the board being more aware of internal control and risk
management as governance issues and handling them. Further, for companies
operating as a group, there are comments to the importance of making actions
from the perspective of the group company level.
Therefore, it is important for the board to supervise the establishment andoperation of effective internal control, enterprise risk management and whistleblowing systems, including on the entire group basis. Considering theimportance of such a system, it is also important to ensure that the necessary
resources are allocated in the establishment and operation of the system.
Furthermore, in order to ensure the reliability of audits, it is important thatkansayaku make appropriate judgments from an independent and objective
standpoint. From this perspective, it is important that kansayaku are appointed
through appropriate procedures, including the consent of the kansayaku board.
(3) General Shareholder Meetings Related Matters

In order to make the entire decision-making process at general shareholder
meetings constructive and substantive, companies are required to takeappropriate measures to ensure the exercise of shareholder rights, and toenhance the provision of information.
To this end, it is important for companies listed on the Prime Market to disclose
necessary information in English and make available the Electronic Voting
Platform.
It is also desirable that consideration be given to the early disclosure ofmaterials for shareholder meeting electronically in a medium that is convenient
for shareholders, and to the setting of the date of the general shareholder
meeting and any associated dates in light of such factors as securing sufficient
time for closing and auditing. In this regard, it is important to encouragecompanies that are considering changing their record dates to do so. In addition,
it would contribute to constructive dialogue with investors if the results of theanalysis of causes and the results of consideration of responses to companyproposed proposals that received a significant number of negative votes at a
general shareholder meeting are explained in an easy-to-understand manner6during dialogue with institutional investors, and if annual securities reports aredisclosed before the general shareholder meeting. Further, when holding ageneral shareholder meeting virtually from the perspective of ensuring
opportunities for shareholders to attend and participate, it is important to ensuretransparency and fairness besides giving consideration to the interests ofshareholders in the operation of the meeting.
(4) Major Issues other than the AboveAs the COVID-19 disaster accelerates changes in the environment
surrounding companies and the increases uncertainty, it will be more necessary
to allocate management resources, including the examination of businessportfolio based on the cost of capital for each business segment.
Therefore, the board (or the board of the group headquarters in the case of acompany with group management) is required to determine and review the basic
policies regarding the business portfolio in a timely and appropriate manner, andto explain the policies and the status of reviews in specific and easy-tounderstand manner in a way that will deepen shareholders' understanding. In
addition, when companies with group management explain their approach andpolicies regarding group management, it is important to make such explanation
specific and easy-to-understand.
While further reduction of cross-shareholdings is also an issue, enhanced
disclosure of methods for examining the holding effects of cross shareholdings†
would contribute to dialogue with institutional investors, and it is desirable tofully take into account the perspective of the common interests of shareholders
in such examination, for example, through effective involvement of independent
directors.
With regard to the relationship between pension fund beneficiaries and thepension fund sponsor, it is important that the sponsor avoids interfering with theinvestment decisions for the interests of the beneficiaries.
Further, given that kansayaku, as well as directors, have a fiduciary
responsibility to shareholders, they should have a basic position to engage indialogue with shareholders to the extent reasonable, taking into account theirrequests and interests, in order to contribute to the sustainable growth of thecompany and the increase of corporate value over the mid-to long-term.
Ⅲ. Implementation of the Revision of the CodeIn April 2022, the Tokyo Stock Exchange will put its new market segmentation
in force. Among the principles and supplementary principles of the revised Code,there are items that apply to companies listed on the Prime Market, items that
Cross-shareholdings include shares that are not directly held by a company but in practice
are under the company’s control, such as shares held in trust for retirement benefit trusts.
†

7

apply to companies listed on other markets, and items that apply to both of themfollowing the new market segmentation.
Companies are expected to submit their corporate governance reports
reflecting the revised Code by December this year at the latest. In addition, withrespect to the principles that apply only to companies listed on the Prime Market,
time may be needed for preparation, so that it is conceivable for companies tobe asked to submit their corporate governance reports reflecting the revised
principles in the timing soon after the conclusion of their general shareholder
meetings that will take place after April 2022. The Tokyo Stock Exchange is
expected to consider the more specific timing of the submission of the reports.
It is desirable that companies listed on other markets also take voluntary
initiatives to improve their governance by using the Code items for companies
listed on the Prime Market as a reference.
Furthermore, for companies listed on the Growth Market, in addition toensuring that the Code's general principles apply as a comply-or-explain norm,
it is desirable that such companies take voluntary initiatives to improve theirgovernance by using the Code's principles and supplementary principles as areference, depending on their situations.
While the revision draft of the Code has been made bearing in mind thecompanies listed on the Tokyo Stock Exchange, other stock exchanges are
expected to consider their version for their markets based on the revision draft,taking into account the characteristics of each elevant market.
IV. Conclusion

The Council anticipates that the Tokyo Stock Exchange will make revisions of
the Code promprtly, and the Financial Services Agency will make revisions of
the Guidelines for Investor and Company Engagement, following the Revision
Drafts.
The Council expects that, as a response to the revised Code, parties in theprivate sector will take measures in substance, and not in form, consistent withthe purpose of revisions.
[End]

8

Appendix 1
Provisional translation

Japan’s Corporate Governance Code
Seeking Sustainable Corporate Growth and Increased Corporate Value
over the Mid- to Long-Term(Draft Revision)

Japan’s Corporate Governance CodeIn this Corporate Governance Code, “corporate governance” means a structure fortransparent, fair, timely and decisive decision-making by companies, with due attention
to the needs and perspectives of shareholders and also customers, employees and local
communities.
This Corporate Governance Code establishes fundamental principles for effective
corporate governance at listed companies in Japan. It is expected that the Code’s
appropriate implementation will contribute to the development and success ofcompanies, investors and the Japanese economy as a whole through individualcompanies’ self-motivated actions so as to achieve sustainable growth and increase
corporate value over the mid- to long-term.

-1-General Principles
Securing the Rights and Equal Treatment of Shareholders

1.

Companies should take appropriate measures to fully secure shareholder rights
and develop an environment in which shareholders can exercise their rights
appropriately and effectively.
In addition, companies should secure effective equal treatment of shareholders.
Given their particular sensitivities, adequate consideration should be given to theissues and concerns of minority shareholders and foreign shareholders for theeffective exercise of shareholder rights and effective equal treatment ofshareholders.

Appropriate Cooperation with Stakeholders Other Than Shareholders

2.

Companies should fully recognize that their sustainable growth and the creationof mid- to long-term corporate value are brought as a result of the provision of
resources and contributions made by a range of stakeholders, including
employees, customers, business partners, creditors and local communities. As
such, companies should endeavor to appropriately cooperate with thesestakeholders.
The board and the management should exercise their leadership in establishing a
corporate culture where the rights and positions of stakeholders are respected andsound business ethics are ensured.

Ensuring Appropriate Information Disclosure and Transparency

3.

Companies should appropriately make information disclosure in compliance withthe relevant laws and regulations, but should also strive to actively provide
information beyond that required by law. This includes both financial information,such as financial standing and operating results, and non-financial information,such as business strategies and business issues, risk, and governance.
The board should recognize that disclosed information will serve as the basis forconstructive dialogue with shareholders, and therefore ensure that suchinformation, particularly non-financial information, is accurate, clear and useful.

-2-Responsibilities of the Board

4.

Given its fiduciary responsibility and accountability to shareholders, in order topromote sustainable corporate growth and the increase of corporate value over themid- to long-term and enhance earnings power and capital efficiency, the board
should appropriately fulfill its roles and responsibilities, including:(1) Setting the broad direction of corporate strategy;(2) Establishing an environment where appropriate risk-taking by the senior
management is supported; and(3) Carrying out effective oversight of directors and the management (including

shikkoyaku and so-called shikkoyakuin) from an independent and objective
standpoint.
Such roles and responsibilities should be equally and appropriately fulfilled
regardless of the form of corporate organization – i.e., Company with Kansayaku
Board (where a part of these roles and responsibilities are performed bykansayaku and the kansayaku board), Company with Three Committees(Nomination, Audit and Remuneration), or Company with Supervisory
Committee.
Dialogue with Shareholders

5.

In order to contribute to sustainable growth and the increase of corporate value
over the mid- to long-term, companies should engage in constructive dialogue
with shareholders even outside the general shareholder meeting.
During such dialogue, senior management and directors, including outside
directors, should listen to the views of shareholders and pay due attention to theirinterests and concerns, clearly explain business policies to shareholders in anunderstandable manner so as to gain their support, and work for developing abalanced understanding of the positions of shareholders and other stakeholders
and acting accordingly.

-3-Section 1: Securing the Rights and Equal Treatment of Shareholders

General Principle 1

Companies should take appropriate measures to fully secure shareholder rights anddevelop an environment in which shareholders can exercise their rights appropriately
and effectively.
In addition, companies should secure effective equal treatment of shareholders.
Given their particular sensitivities, adequate consideration should be given to theissues and concerns of minority shareholders and foreign shareholders for the effective
exercise of shareholder rights and effective equal treatment of shareholders.
Notes
Companies have various stakeholders, including shareholders. Without appropriate
cooperation with these stakeholders, it would be difficult for companies to achievesustainable growth. Suppliers of capital are an important cornerstone, and shareholders
are the primary starting point for corporate governance discipline. Companies should
secure appropriate cooperation with shareholders and strive toward the achievement ofsustainable growth by fully securing shareholder rights and providing for the smooth
exercise thereof.
In addition, the Companies Act requires companies to equally treat shareholders basedon the class and number of shares they hold. Gaining broad confidence of shareholders
that they receive equal treatment will also contribute to strengthening support from the
suppliers of capital.

-4-Principle 1.1 Securing the Rights of Shareholders

Companies should take appropriate measures to fully secure shareholder rights,
including voting rights at the general shareholder meeting.
Supplementary Principles
1.1.1

When the board recognizes that a considerable number of votes have been castagainst a proposal by the company and the proposal was approved, it should
analyze the reasons behind opposing votes and why many shareholders opposed,
and should consider the need for shareholder dialogue and other measures.

1.1.2

When proposing to shareholders that certain powers of the general shareholder
meeting be delegated to the board, companies should consider whether the board
is adequately constituted to fulfill its corporate governance roles andresponsibilities. If a company determines that the board is indeed adequately
constituted, then it should recognize that such delegation may be desirable fromthe perspectives of agile decision-making and expertise in business judgment.

1.1.3

Given the importance of shareholder rights, companies should ensure that theexercise of shareholder rights is not impeded. In particular, adequate
consideration should be given to the special rights that are recognized forminority shareholders with respect to companies and their officers, including theright to seek an injunction against illegal activities or the right to file ashareholder lawsuit, since the exercise of these rights tend to be prone to issues
and concerns.

-5-Principle 1.2 Exercise of Shareholder Rights at General Shareholder Meetings

Companies should recognize that general shareholder meetings are an opportunity
for constructive dialogue with shareholders, and should therefore take appropriate
measures to ensure the exercise of shareholder rights at such meetings.
Supplementary Principles
1.2.1

Companies should provide accurate information to shareholders as necessary inorder to facilitate appropriate decision-making at general shareholder meetings.

1.2.2

While ensuring the accuracy of content, companies should strive to send
convening notices for general shareholder meetings early enough to give
shareholders sufficient time to consider the agenda. During the period between
the board approval of convening the general shareholder meeting and sending
the convening notice, information included in the convening notice should be
disclosed by electronic means such as through TDnet 1 or on the company’s
website.

1.2.3

The determination of the date of the general shareholder meeting and any
associated dates should be made in consideration of facilitating sufficientconstructive dialogue with shareholders and ensuring the accuracy of
information necessary for such dialogue.

1.2.4

Bearing in mind the number of institutional and foreign shareholders, 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
translations of the convening notices of general shareholder meeting.
In particular, companies listed on the Prime Market should make the Electronic
Voting Platform available, at least to institutional investors.

1.2.5

In order to prepare for cases where institutional investors who hold shares instreet name express an interest in advance of the general shareholder meeting in
attending the general shareholder meeting or exercising voting rights, companies
should work with the trust bank (shintaku ginko) and/or custodial institutions to1

TDnet: The Tokyo Stock Exchange operates a real-time internet service (Timely Disclosure
network) which distributes the information provided by listed companies on a timely basis inaccordance with its listing rules.

-6-

consider such possibility.

Principle 1.3 Basic Strategy for Capital Policy

Because capital policy may have a significant effect on shareholder returns,
companies should explain their basic strategy with respect to their capital policy.

Principle 1.4 Cross-Shareholdings

When companies hold shares of other listed companies as cross-shareholdings2, theyshould disclose their policy with respect to doing so, including their policies regarding
the reduction of cross-shareholdings. In addition, the board should annually assess
whether or not to hold each individual cross-shareholding, specifically examining
whether the purpose is appropriate and whether the benefits and risks from each holding
cover the company’s cost of capital. The results of this assessment should be disclosed.
Companies should establish and disclose specific standards with respect to the voting
rights as to their cross-shareholdings, and vote in accordance with the standards.
Supplementary Principles
1.4.1

When cross-shareholders (i.e., shareholders who hold a company’s shares for the
purpose of cross-shareholding) indicate their intention to sell their shares,
companies should not hinder the sale of the cross-held shares by, for instance,
implying a possible reduction of business transactions.

1.4.2

Companies should not engage in transactions with cross-shareholders which
may harm the interests of the companies or the common interests of theirshareholders by, for instance, continuing the transactions without carefully
examining the underlying economic rationale.

2

Cross-shareholding: There are cases where listed companies hold the shares of other listedcompanies for reasons other than pure investment purposes, for example, to strengthen business
relationships. Cross-shareholdings here include not only mutual shareholdings but also unilateral
ones.

-7-

Principle 1.5 Anti-Takeover Measures

Anti-takeover measures must not have any objective associated with entrenchmentof the management or the board. With respect to the adoption or implementation ofanti-takeover measures, the board and kansayaku 3 should carefully examine theirnecessity and rationale in light of their fiduciary responsibility to shareholders, ensure
appropriate procedures, and provide sufficient explanation to shareholders.
Supplementary Principle
1.5.1

In case of a tender offer, companies should clearly explain the position of theboard, including any counteroffers, and should not take measures that would
frustrate shareholder rights to sell their shares in response to the tender offer.

Principle 1.6 Capital Policy that May Harm Shareholder Interests

With respect to a company's capital policy that results in the change of control or insignificant dilution, including share offerings and management buyouts, the board andkansayaku should, in order not to unfairly harm the existing shareholders’ interests,
carefully examine the necessity and rationale from the perspective of their fiduciary
responsibility to shareholders, should ensure appropriate procedures, and provide
sufficient explanation to shareholders.

Principle 1.7 Related Party Transactions

When a company engages in transactions with its directors or major shareholders(i.e., related party transactions), in order to ensure that such transactions do not harm
the interests of the company or the common interests of its shareholders and prevent
any concerns with respect to such harm, the board should establish appropriate
procedures beforehand in proportion to the importance and characteristics of thetransaction. In addition to their use by the board in approving and monitoring suchtransactions, these procedures should be disclosed.

3

Kansayaku: See Notes to the General Principle 4.

-8-Section 2: Appropriate Cooperation with Stakeholders Other Than
Shareholders

General Principle 2

Companies should fully recognize that their sustainable growth and the creation of
mid- to long-term corporate value are brought about as a result of the provision of
resources and contributions made by a range of stakeholders, including employees,
customers, business partners, creditors and local communities. As such, companies
should endeavor to appropriately cooperate with these stakeholders.
The board and the management should exercise their leadership in establishing a
corporate culture where the rights and positions of stakeholders are respected andsound business ethics are ensured.
Notes
Companies have a variety of important stakeholders besides shareholders. These
stakeholders include internal parties such as employees and external parties such as
customers, business partners and creditors. In addition, local communities form thefoundation for the on-going business activities of companies. Companies should fullyrecognize that appropriate cooperation with these stakeholders is indispensable inachieving sustainable growth and increasing corporate value over the mid- to longterm.Given the recent and growing interest in social and environmental problems
worldwide, taking positive and proactive measures toward ESG (environmental, socialand governance) matters may also be included as part of this cooperation.
Moreover, given that the Sustainable Development Goals (SDGs) were adopted at theUnited Nations Summit and the number of organizations supporting the recommendationof the FSB’s Task Force on Climate-related Financial Disclosure (TCFD) has increased,
there is a growing awareness that sustainability (mid-to long-term sustainability including
ESG factors) is an important management issue from the perspective of increasing midto long-term corporate value. In light of this, it is important for Japanese companies tofurther promote positive and proactive responses to sustainability issues.
The appropriate actions of companies based on the recognition of their stakeholder
responsibilities will benefit the entire economy and society, which will in turn contributeto producing further benefits to companies, thereby creating a virtuous cycle.

-9-Principle 2.1 Business Principles as the Foundation of Corporate Value Creation
Over the Mid- to Long-Term

Guided by their position concerning social responsibility, companies should
undertake their businesses in order to create value for all stakeholders while increasing
corporate value over the mid- to long-term. To this end, companies should draft andmaintain business principles that will become the basis for such activities.

Principle 2.2 Code of Conduct

Companies should draft and implement a code of conduct for employees in order toexpress their values with respect to appropriate cooperation with and serving theinterests of stakeholders and carrying out sound and ethical business activities. The
board should be responsible for drafting and revising the code of conduct, and should
ensure its compliance broadly across the organization, including the front line ofdomestic and global operations.
Supplementary Principle
2.2.1

The board should review regularly (or where appropriate) whether or not thecode of conduct is being widely implemented. The review should focus on thesubstantive assessment of whether the company’s corporate culture truly
embraces the intent and spirit of the code of conduct, and not solely on the formof implementation and compliance.

Principle 2.3 Sustainability Issues, Including Social and Environmental Matters

Companies should take appropriate measures to address sustainability issues,
including social and environmental matters.
Supplementary Principle
2.3.1

With the recognitionThe board should recognize that dealing with sustainability
issues, is an important elementsuch as taking care of risk management, the board
should take appropriate actions to this end. Given the increasing demandclimatechange and interest with other global environmental issues, respect tosustainability issues in recent years, the boardof human rights, fair and- 10 -

appropriate treatment of the workforce including caring for their health andworking environment, fair and reasonable transactions with suppliers, and crisis
management for natural disasters, are important management issues that can leadto earning opportunities as well as risk mitigation, and should further consider
addressing these matters positively and proactively. in terms of increasing
corporate value over the mid-to long-term.

Principle 2.4 Ensuring Diversity, Including Active Participation of Women

Companies should recognize that the existence of diverse perspectives and values
reflecting a variety of experiences, skills and characteristics is a strength that supports
their sustainable growth. As such, companies should promote diversity of personnel,
including the active participation of women.
Supplementary Principle
2.4.1

Companies should present their policies and voluntary and measurable goals for
ensuring diversity in the promotion to core human resources, such as thepromotion of women, foreign nationals and midcareer hires to middle
managerial positions, as well as disclosing their status.
In addition, in light of the importance of human resource strategies for increasing
corporate value over the mid-to long-term, companies should present its policies
for human resource development and internal environment development toensure diversity, as well as the status of their implementation.

Principle 2.5 Whistleblowing

Companies should establish an appropriate framework for whistleblowing such that
employees can report illegal or inappropriate behavior, disclosures, or any other serious
concerns without fear of suffering from disadvantageous treatment. Also, theframework should allow for an objective assessment and appropriate response to thereported issues, and the board should be responsible for both establishing thisframework, and ensuring and monitoring its enforcement.
Supplementary Principle
2.5.1

As a part of establishing a framework for whistleblowing, companies should- 11 -

establish a point of contact that is independent of the management (for example,
a panel consisting of outside directors4 and outside kansayaku5). In addition,
rules should be established to secure the confidentiality of the information
provider and prohibit any disadvantageous treatment.

Principle 2.6 Roles of Corporate Pension Funds as Asset Owners

Because the management of corporate pension funds impacts stable asset formationfor employees and companies’ own financial standing, companies should take anddisclose measures to improve human resources and operational practices, such as therecruitment or assignment of qualified persons, in order to increase the investment
management expertise of corporate pension funds (including stewardship activities
such as monitoring the asset managers of corporate pension funds), thus making surethat corporate pension funds perform their roles as asset owners. Companies should
ensure that conflicts of interest which could arise between pension fund beneficiaries
and companies are appropriately managed.

4

Outside director: A director who satisfies certain requirements such as not holding specific positions,
including the position of executive director, in the company or its subsidiaries (Article 2, Paragraph
15 of the Companies Act). Furthermore, matters such as not holding a specific position in the parent
company or other subsidiaries and not having specific kinship ties with controlling shareholders willbe also required for outside directors after the 2014 amendments to the Companies Act.

5

Outside kansayaku: A kansayaku who satisfies certain requirements such as not holding specificpositions, including the position of director, in the company or its subsidiaries (Article 2, Paragraph
16 of the Companies Act). Furthermore, matters such as not holding a specific position in the parent
company or other subsidiaries and not having specific kinship ties with controlling shareholders willbe also required for outside kansayaku after the 2014 amendments to the Companies Act.

- 12 -

Section 3: Ensuring Appropriate Information Disclosure andTransparency

General Principle 3

Companies should appropriately make information disclosure in compliance withthe relevant laws and regulations, but should also strive to actively provide information
beyond that required by law. This includes both financial information, such as financial
standing and operating results, and non-financial information, such as businessstrategies and business issues, risk and governance.
The board should recognize that disclosed information will serve as the basis forconstructive dialogue with shareholders, and therefore ensure that such information,
particularly non-financial information, is accurate, clear and useful.
Notes
Companies are legally required to disclose a wide range of information. The timely andappropriate disclosure of information in accordance with the relevant laws andregulations is essential for investor protection and securing market confidence. The board,kansayaku, the kansayaku board 6 and external auditors all bear an important
responsibility in this regard, starting with the establishment of an appropriate internal
control system as to financial information.
Companies should actively strive to provide information other than what is required bylaws and regulations.
It has been noted that while the quantitative part of financial statements of Japanesecompanies conform to a standard format and therefore excel with respect to comparability,
non-financial information, such as financial standing, business strategies, risks and ESG(environmental, social and governance) matters, is often boiler-plate and lacking in detail,therefore less valuable. The board should actively commit to ensure that disclosed
information, including non-financial information, is as valuable and useful as possible.
Irrespective of whether the disclosed information is required by law, the appropriate
provision of information is an effective means to develop a shared awareness andunderstanding with shareholders and other stakeholders, in particular given that as

6

Kansayaku board: See Notes to the General Principle 4.

- 13 -

outsiders they suffer from information asymmetry. Appropriate information disclosure
will also contribute to constructive dialogue based on Japan’s Stewardship Code.

Principle 3.1 Full Disclosure

In addition to making information disclosure in compliance with relevant laws andregulations, companies should disclose and proactively provide the information listed
below (along with the disclosures specified by the principles of the Code) in order toenhance transparency and fairness in decision-making and ensure effective corporate
governance:i)Company objectives (e.g., business principles), business strategies and businessplans;

ii) Basic views and guidelines on corporate governance based on each of theprinciples of the Code;iii) Board policies and procedures in determining the remuneration of the senior
management and directors;iv) Board policies and procedures in the appointment/dismissal of the senior
management and the nomination of directors and kansayaku candidates; andv) Explanations with respect to the individual appointments/dismissals andnominations based on iv).
Supplementary Principles
3.1.1

These disclosures, including disclosures in compliance with relevant laws andregulations, should add value for investors, and the board should ensure that
information is not boiler-plate or lacking in detail.

3.1.2

Bearing in mind the number of foreign shareholders, companies should, to theextent reasonable, take steps for providing English language disclosures.
In particular, companies listed on the Prime Market should disclose and provide
necessary information in their disclosure documents in English.

3.1.3

Companies should appropriately disclose their initiatives on sustainability whendisclosing their management strategies. They should also provide information
on investments in human capital and intellectual properties in an understandable- 14 -

and specific manner, while being conscious of the consistency with their own
management strategies and issues.
In particular, companies listed on the Prime Market should collect and analyze
the necessary data on the impact of climate change-related risks and earning
opportunities on their business activities and profits, and enhance the quality andquantity of disclosure based on the TCFD recommendations, which are aninternationally well-established disclosure framework, or an equivalentframework.

Principle 3.2 External Auditors

External auditors and companies should recognize the responsibility that external
auditors owe toward shareholders and investors, and take appropriate steps to secure
the proper execution of audits.
Supplementary Principles
3.2.1

The kansayaku board should, at minimum, ensure the following:i)

Establish standards for the appropriate selection of external auditor
candidates and proper evaluation of external auditors; andii)

Verify whether external auditors possess necessary independence andexpertise to fulfill their responsibilities.

3.2.2

The board and the kansayaku board should, at minimum, ensure the following:i)

Give adequate time to ensure high quality audits;ii)

Ensure that external auditors have access, such as via interviews, to thesenior management including the CEO and the CFO;iii) Ensure adequate coordination between external auditors and each of thekansayaku (including attendance at the kansayaku board meetings), theinternal audit department and outside directors; and- 15 -

iv) Ensure that the company is constituted in the way that it can adequately
respond to any misconduct, inadequacies or concerns identified by theexternal auditors.

- 16 -

Section 4: Responsibilities of the Board

General Principle 4

Given its fiduciary responsibility and accountability to shareholders, in order topromote sustainable corporate growth and the increase of corporate value over the midto long-term and enhance earnings power and capital efficiency, the board should
appropriately fulfill its roles and responsibilities, including:(1) Setting the broad direction of corporate strategy;(2) Establishing an environment where appropriate risk-taking by the senior
management is supported; and(3) Carrying out effective oversight of directors and the management (including

shikkoyaku7 and so-called shikkoyakuin8) from an independent and objective
standpoint.
Such roles and responsibilities should be equally and appropriately fulfilled
regardless of the form of corporate organization – i.e., Company with Kansayaku
Board (where a part of these roles and responsibilities are performed by kansayaku andthe kansayaku board), Company with Three Committees (Nomination, Audit andRemuneration) or Company with Supervisory Committee.
Notes
Companies may choose one of three main forms of organizational structure under theCompanies Act (Revised in 2014): Company with Kansayaku Board, Company withThree Committees (Nomination, Audit and Remuneration), or Company with
Supervisory Committee. A Company with Kansayaku Board is a system unique to Japanin which certain governance functions are assumed by the board, kansayaku and thekansayaku board. Under this system, kansayaku audit the performance of duties by
7

Shikkoyaku: According to the Companies Act, Companies with Three Committees (Nomination,
Audit and Remuneration) must appoint one or more shikkoyaku from directors or non-directors by
a resolution of the board and delegate business administration to shikkoyaku. Also, authority to makecertain kinds of business decisions may be delegated to shikkoyaku.

8

Shikkoyakuin: There are cases where a Company with Kansayaku Board or a Company with
Supervisory Committee creates positions with the title of “shikkoyakuin” for persons who aredelegated by the board a certain range of discretion regarding business administration. Unlike
shikkoyaku in Companies with Three Committees (Nomination, Audit and Remuneration),shikkoyakuin is not a statutory position.

- 17 -

directors and the management and have investigation power by law. Also, to secure both
independence and high-level information gathering power, not less than half of kansayaku,
as appointed at the general shareholder meeting, must be outside kansayaku, and at least
one full-time kansayaku must also be appointed. The latter two forms of organizational
structure are similar to companies in other countries where committees are establishedunder the board and assigned certain responsibilities with the aim of strengthening
monitoring functions. Irrespective of which form of organizational structure is adopted,
what is important is that the various institutions within the company effectively and fully
execute their responsibilities through creativity and ingenuity.
One of the major objectives of establishing the Code is to promote transparent, fair,timely and decisive decision-making by Japanese companies. The possibility cannot be
ruled out that, due to changes in the external environment or other factors, a decision
made by a company ultimately results in losses for the company. In such a circumstance,
the reasonableness of the decision-making process at the time of the decision is generally
considered an important factor in determining whether or not the management anddirectors should owe personal liability for damages. The Code includes principles andpractices that are expected to contribute to such a reasonable decision-making process,and promote transparency, fairness, timeliness and decisiveness as well.
Controlling shareholders should respect the common interests of the company and its
shareholders and should not treat minority shareholders unfairly, and accordingly,
companies with a controlling shareholder are required to develop a governance system toprotect the interest of minority shareholders.

Principle 4.1 Roles and Responsibilities of the Board (1)The board should view the establishment of corporate goals (business principles,etc.) and the setting of strategic direction as one major aspect of its roles andresponsibilities. It should engage in constructive discussion with respect to specificbusiness strategies and business plans, and ensure that major operational decisions are
based on the company’s strategic direction.
Supplementary Principles
4.1.1

The board should clearly specify its own decisions as well as both the scope andcontent of the matters delegated to the management, and disclose a briefsummary thereof.
- 18 -

4.1.2

Recognizing that a mid-term business plan (chuuki keiei keikaku) is acommitment to shareholders, the board and the senior management should dotheir best to achieve the plan. Should the company fail to deliver on its mid-termbusiness plan, the reasons underlying the failure of achievement as well as thecompany’s actions should be fully analyzed, an appropriate explanation should
be given to shareholders, and analytic findings should be reflected in a plan for
the ensuing years.

4.1.3

Based on the company objectives (business principles, etc.) and specific businessstrategies, the board should proactively engage in the establishment andimplementation of a succession plan for the CEO and other top executives andappropriately oversee the systematic development of succession candidates,
deploying sufficient time and resources.

Principle 4.2 Roles and Responsibilities of the Board (2)The board should view the establishment of an environment that supports
appropriate risk-taking by the senior management as a major aspect of its roles andresponsibilities. It should welcome proposals from the management based on healthy
entrepreneurship, fully examine such proposals from an independent and objective
standpoint with the aim of securing accountability, and support timely and decisivedecision-making by the senior management when approved plans are implemented.
Also, the remuneration of the management should include incentives such that itreflects mid- to long-term business results and potential risks, as well as promotes
healthy entrepreneurship.
Supplementary Principle
4.2.1

The board should design management remuneration systems such that they
operate as a healthy incentive to generate sustainable growth, and determine
actual remuneration amounts appropriately through objective and transparent
procedures. The proportion of management remuneration linked to mid- to longterm results and the balance of cash and stock should be set appropriately.

4.2.2

The board should develop a basic policy for the company's sustainability- 19 -

initiatives from the perspective of increasing corporate value over the mid- tolong- term.
In addition, in light of the importance of investments in human capital andintellectual properties, the board should effectively supervise the allocation ofmanagement resources, including such investments, and the implementation ofbusiness portfolio strategies to ensure that they contribute to the sustainablegrowth of the company.

Principle 4.3 Roles and Responsibilities of the Board (3)The board should view the effective oversight of the management and directors froman independent and objective standpoint as a major aspect of its roles andresponsibilities. It should appropriately evaluate company performance and reflect theevaluation in its assessment of the senior management.
In addition, the board should engage in oversight activities in order to ensure timely
and accurate information disclosure, and should establish appropriate internal control
and risk management systems.
Also, the board should appropriately deal with any conflict of interests that may arise
between the company and its related parties, including the management and controllingshareholders.
Supplementary Principles
4.3.1

The board should ensure that the appointment and dismissal of the senior
management are based on highly transparent and fair procedures via an
appropriate evaluation of the company’s business results.

4.3.2

Because the appointment/dismissal of the CEO is the most important strategic
decision for a company, the board should appoint a qualified CEO throughobjective, timely, and transparent procedures, deploying sufficient time andresources.

4.3.3

The board should establish objective, timely, and transparent procedures suchthat a CEO is dismissed when it is determined, via an appropriate evaluation of
the company’s business results, that the CEO is not adequately fulfilling theCEO’s responsibilities.
- 20 -

4.3.4The establishment of effective internal control and proactive enterprise risk
management systems for compliance and financial reporting has the potential of
to supporting sound risk-taking. The board should place priority on theappropriate establishment ofappropriately establish such systems andon an
enterprise basis and oversee the operational status, besides utilizing the oversightof whether they effectively operate, and should not limit itself to the examinationof compliance with respect to specific business operations.internal audit
department.

Principle 4.4 Roles and Responsibilities of Kansayaku and the Kansayaku Board

Kansayaku and the kansayaku board should bear in mind their fiduciary
responsibilities to shareholders and make decisions from an independent and objective
standpoint when executing their roles and responsibilities including the audit of theperformance of directors’ duties, appointment and dismissal of kansayaku and external
auditors, and the determination of auditor remuneration.
Although so-called “defensive functions,” such as business and accounting audits,are part of the roles and responsibilities expected of kansayaku and the kansayaku
board, in order to fully perform their duties, it would not be appropriate for kansayaku
and the kansayaku board to interpret the scope of their function too narrowly, and theyshould positively and proactively exercise their rights and express their views at board
meetings and to the management.
Supplementary Principle
4.4.1

Given that not less than half of the kansayaku board must be composed of outsidekansayaku and that at least one full-time kansayaku must be appointed inaccordance with the Companies Act, the kansayaku board should, from theperspective of fully executing its roles and responsibilities, increase its
effectiveness through an organizational combination of the independence of theformer and the information gathering power of the latter. In addition, kansayaku
or the kansayaku board should secure cooperation with outside directors so thatsuch directors can strengthen their capacity to collect information without having
their independence jeopardized.

- 21 -

Principle 4.5 Fiduciary Responsibilities of Directors and Kansayaku

With due attention to their fiduciary responsibilities to shareholders, the directors,

kansayaku and the management of companies should secure the appropriate
cooperation with stakeholders and act in the interest of the company and the common
interests of its shareholders.

Principle 4.6 Business Execution and Oversight of the Management

In order to ensure effective, independent and objective oversight of the managementby the board, companies should consider utilizing directors who are neither involvedin business execution nor have close ties with the management.

Principle 4.7 Roles and Responsibilities of Independent Directors

Companies should make effective use of independent directors 9 , taking into
consideration the expectations listed below with respect to their roles andresponsibilities:i)

Provision of advice on business policies and business improvement based on
their knowledge and experience with the aim to promote sustainable corporate
growth and increase corporate value over the mid- to long-term;ii) Monitoring of the management through important decision-making at the board
including the appointment and dismissal of the senior management;iii) Monitoring of conflicts of interest between the company and the management
or controlling shareholders; andiv) Appropriately representing the views of minority shareholders and otherstakeholders in the boardroom from a standpoint independent of the
management and controlling shareholders.

9

Independent director: The listing rules of securities exchanges provide that the outside directors, as
defined in the Companies Act, are independent directors where they satisfy independence criteria ofsecurities exchanges and the company determines that they do not have the possibility of conflictsof interest with its shareholders.

- 22 -

Principle 4.8 Effective Use of Independent Directors

Independent directors should fulfill their roles and responsibilities with the aim ofcontributing to sustainable growth of companies and increasing corporate value overthe mid- to long-term. Companies listed on the Prime Market should therefore appointat least two one-third of their directors as independent directors (two directors if listed
on other markets) that sufficiently have such qualities.
Irrespective of the above, if a company listed on the Prime Market believes it needs
to appoint the majority of directors (at least one-third of directors if listed on othermarkets) as independent directors based on a broad consideration of factors such as theindustry, company size, business characteristics, organizational structure andcircumstances surrounding the company, it should appoint a sufficient number of
independent directors.
Supplementary Principles
4.8.1

In order to actively contribute to discussions at the board, independent directors
should endeavor to exchange information and develop a shared awareness among
themselves from an independent and objective standpoint. Regular meetings
consisting solely of independent directors (executive sessions) would be one wayof achieving this.

4.8.2

Independent directors should endeavor to establish a framework forcommunicating with the management and for cooperating with kansayaku or thekansayaku board by, for example, appointing the lead independent director fromamong themselves.
4.8.3

Companies that have a controlling shareholder should either appoint at least onethird of their directors (the majority of directors if listed on the Prime Market) as
independent directors who are independent of the controlling shareholder or
establish a special committee composed of independent persons including
independent director(s) to deliberate and review material transactions or actions
that conflict with the interests of the controlling shareholder and minority
shareholders.

- 23 -

Principle 4.9 Independence Standards and Qualification for Independent
Directors

Boards should establish and disclose independence standards aimed at securing
effective independence of independent directors, taking into consideration the
independence criteria set by securities exchanges. The board should endeavor to selectindependent director candidates who are expected to contribute to frank, active andconstructive discussions at board meetings.

Principle 4.10 Use of Optional Approach

In adopting the most appropriate organizational structure (as stipulated by theCompanies Act) that is suitable for a company’s specific characteristics, companies
should employ optional approaches, as necessary, to further enhance governancefunctions.
Supplementary Principle
4.10.1 If the organizational structure of a company is either Company with Kansayaku
Board or Company with Supervisory Committee and independent directors do
not compose a majority of the board, in order to strengthen the independence,
objectivity and accountability of board functions on the matters of nomination(including succession plan) and remuneration of the senior management anddirectors, the company should seek appropriate involvement and advice fromindependent directorsthe committees, including from the perspective of genderand other diversity and skills, in the examination of such important matters asnominations and remuneration by establishing an independent advisorycommittees under the board, such as an optional10 nomination committee and an
optional remuneration committee under the board, to which independent
directorssuch committees make significant contributions.
In particular, companies listed on the Prime Market should basically have themajority of the members of each committee be independent directors, and should
disclose the mandates and roles of the committees, as well as the policy
regarding the independence of the composition.
10

If a company is either a Company with Kansayaku Board or Company with Supervisory Committee,
the company is not required to establish a nomination committee or a remuneration committee by
the Companies Act. However, the company may establish such committees on its own initiative.

- 24 -

Principle 4.11 Preconditions for Board and Kansayaku Board EffectivenessThe board should be well balanced in knowledge, experience and skills in order tofulfill its roles and responsibilities, and it should be constituted in a manner to achieveboth diversity, including gender and, international experience, work experience andage, and appropriate size. In addition, persons with appropriate experience and skills
as well as necessary knowledge on finance, accounting, and the law should be
appointed as kansayaku. In particular, at least one person who has sufficient expertiseon finance and accounting should be appointed as kansayaku.
The board should endeavor to improve its function by analyzing and evaluating
effectiveness of the board as a whole.
Supplementary Principles
4.11.1 The board should identify the skills, etc. that it should have in light of its
managing strategies, and have a view on the appropriate balance between
knowledge, experience and skills of the board as a whole, and also on diversity
and appropriate board size. Consistent with its view, the board should establish
policies and procedures for nominating directors and disclose them along with its
viewthe combination of skills, etc. that each director possesses in an appropriate
form according to the business environment and business characteristics, etc.,
such as what is known as a "skills matrix.” When doing so, independent
director(s) with management experience in other companies should be included.
4.11.2 Outside directors, outside kansayaku, and other directors and kansayaku should
devote sufficient time and effort required to appropriately fulfill their respectiveroles and responsibilities. Therefore, where directors and kansayaku also serve as
directors, kansayaku or the management at other companies, such positions
should be limited to a reasonable number and disclosed each year.
4.11.3 Each year the board should analyze and evaluate its effectiveness as a whole,taking into consideration the relevant matters, including the self-evaluations ofeach director. A summary of the results should be disclosed.

- 25 -

Principle 4.12 Active Board Deliberations

The board should endeavor to foster a climate where free, open and constructive
discussions and exchanges of views take place, including the raising of concerns byoutside directors.
Supplementary Principle
4.12.1 The board should ensure the following in relation to the operation of board
meetings and should attempt to make deliberations active:i)Materials for board meetings are distributed sufficiently in advance of themeeting date;ii)

In addition to board materials and as necessary, sufficient information isprovided to directors by the company (where appropriate, the information
should be organized and/or analyzed to promote easy understanding);iii) The schedule of board meetings for the current year and anticipated agenda
items are determined in advance;iv) The number of agenda items and the frequency of board meetings are set
appropriately; andv)

Sufficient time for deliberations.

Principle 4.13 Information Gathering and Support Structure

In order to fulfill their roles and responsibilities, directors and kansayaku should
proactively collect information, and as necessary, request the company to provide themwith additional information.
Also, companies should establish a support structure for directors and kansayaku,
including providing sufficient staff.
The board and the kansayaku board should verify whether information requested bydirectors and kansayaku is provided smoothly.

- 26 -

Supplementary Principles
4.13.1 Directors, including outside directors, should request the company to provide themwith additional information, where deemed necessary from the perspective ofcontributing to transparent, fair, timely and decisive decision-making. In addition,kansayaku,

includingoutsidekansayaku,

shouldcollect

information

appropriately, including the use of their statutory investigation power.
4.13.2 Directors and kansayaku should consider consulting with external specialists at
company expense, where they deem it necessary.
4.13.3 Companies should ensure coordination between the internal audit department,
directors and kansayaku. by establishing a system in which the internal audit
department appropriately reports directly to the board and the kansayaku board
in order for them to fulfill their functions. In addition, companies should takemeasures to adequately provide necessary information to outside directors andoutside kansayaku. One example would be the appointment of an individual who
is responsible for communicating and handling requests within the company suchthat the requests for information about the company by outside directors andoutside kansayaku are appropriately processed.

Principle 4.14 Director and Kansayaku Training

New and incumbent directors and kansayaku should deepen their understanding of
their roles and responsibilities as a critical governance body at a company, and should
endeavor to acquire and update necessary knowledge and skills. Accordingly,
companies should provide and arrange training opportunities suitable to each director
and kansayaku along with financial support for associated expenses. The board shouldverify whether such opportunities and support are appropriately provided.
Supplementary Principles
4.14.1 Directors and kansayaku, including outside directors and outside kansayaku,
should be given the opportunity when assuming their position to acquirenecessary knowledge on the company’s business, finances, organization andother matters, and fully understand the roles and responsibilities, including legal
liabilities, expected of them. Incumbent directors should also be given a- 27 -

continuing opportunity to renew and update such knowledge as necessary.
4.14.2 Companies should disclose their training policy for directors and kansayaku.

- 28 -

Section 5: Dialogue with Shareholders

General Principle 5

In order to contribute to sustainable growth and the increase of corporate value overthe mid- to long-term, companies should engage in constructive dialogue withshareholders even outside the general shareholder meeting.
During such dialogue, senior management and directors, including outside directors,
should listen to the views of shareholders and pay due attention to their interests andconcerns, clearly explain business policies to shareholders in an understandable
manner so as to gain their support, and work for developing a balanced understandingof the positions of shareholders and other stakeholders and acting accordingly.
Notes
With the establishment of Japan’s Stewardship Code, institutional investors areencouraged to engage in purposeful dialogue (engagement) based on the in-depth
knowledge of investee companies and their business environment.
Regularly engaging in dialogue with shareholders to gain their understanding ofspecific business strategies and business plans and taking appropriate action when there
are concerns are extraordinarily useful for companies to strengthen the foundations ofmanagement legitimacy and support their efforts to generate sustainable growth.
Although the management and directors have opportunities to interact and exchange
views with employees, business partners and financial institutions on a daily basis, thesestakeholders are all creditors. In contrast, the management and directors typically have
limited interactions with shareholders. If the senior management and directors give due
attention to the views of shareholders through dialogue, they can absorb views andanalyses of business management from the perspective of capital providers. Dialogue
with shareholders should also inspire healthy entrepreneurship in the management anddirectors and thereby contribute to sustainable corporate growth.

- 29 -

Principle 5.1 Policy for Constructive Dialogue with Shareholders

Companies should, positively and to the extent reasonable, respond to the requests
from shareholders to engage in dialogue (management meetings) so as to support
sustainable growth and increase corporate value over the mid- to long-term. The board
should establish, approve and disclose policies concerning the measures andorganizational structures aimed at promoting constructive dialogue with shareholders.
Supplementary Principles
5.1.1

Taking the requests and interests of shareholders into consideration, to the extent
reasonable, the senior management and, directors, including outside directors,
and kansayaku, should have a basic position to engage in dialogue (management
meetings) with shareholders.

5.1.2

At minimum, policies for promoting constructive dialogue with shareholders
should include the following:i)

Appointing a member of the management or a director who is responsible
for overseeing and ensuring that constructive dialogue takes place, including
the matters stated in items ii) to v) below;ii)

Measures to ensure positive cooperation between internal departments suchas investor relations, corporate planning, general affairs, corporate finance,accounting and legal affairs with the aim of supporting dialogue;iii) Measures to promote opportunities for dialogue aside from individual
meetings (e.g., general investor meetings and other IR activities);iv) Measures to appropriately and effectively relay shareholder views andconcerns learned through dialogue to the senior management and the board;andv)

Measures to control insider information when engaging in dialogue.

- 30 -

5.1.3Companies should endeavor to identify their shareholder ownership structure asnecessary, and it is desirable for shareholders to cooperate as much as possible inthis process.

Principle 5.2 Establishing and Disclosing Business Strategies and Business Plans

When establishing and disclosing business strategies and business plans, companies
should articulate their earnings plans and capital policies, and present targets forprofitability and capital efficiency after accurately identifying the company’s cost ofcapital. Also, companies should provide explanations that are clear and logical toshareholders with respect to the allocation of management resources, such as reviewing
their business portfolio and investments in fixed assets, R&D, and human resources,
and specific measures that will be taken in order to achieve their plans and targets.
Supplementary Principle
5.2.1

In formulating and announcing business strategies, etc., companies should clearlypresent the basic policy regarding the business portfolio decided by the board andthe status of the review of such portfolio.

- 31 -

Appendix 2
Provisional translation

Guidelines for Investor and Company Engagement

Guidelines for Investor and Company Engagement

The Guidelines herein provide agenda items for engagement that institutional investors andcompanies are expected to focus on based on the Stewardship Code and the Corporate Governance
Code, in recognition of the corporate governance issues prevalent at this time. Through constructive
engagement with institutional investors, companies are expected to generate sustainable growth andincrease corporate value over the mid- to long-term based on their own business principles1, which
will eventually lead to the growth of the Japanese economy as a whole and stable asset formation for
the Japanese people.
The Guidelines are intended to be a supplemental document to the Stewardship Code and the
Corporate Governance Code. Although the intention is not to require institutional investors andcompanies to “comply or explain” with respect to the Guidelines themselves, the Guidelines areintended to encourage institutional investors and companies to implement both Codes effectively on
a “comply or explain” basis2. Companies are expected to consider the contents of the Guidelines
when they comply with a principle of the Corporate Governance Code, including principles callingfor disclosure, or, if not, explain the reasons why they are not doing so.
Because corporate governance issues and company priorities are diverse, it is not appropriate to use
the Guidelines’ agenda items as a mechanical checklist, and it is important to have effective
engagement between investors and companies that takes into consideration each company’s specificcircumstances3.
1. Management Decisions in Response to Changes in the Business Environment

1.1

Are specific business strategies and business plans established and disclosed to generate
sustainable growth and increase corporate value over the mid- to long-term? Are these businessstrategies and business plans consistent with the company’s business principles?

1.2

Does management accurately identify the company’s cost of capital, reflecting risks associatedwith the business in an appropriate manner? Does management manage the business with arecognition of the company’s cost of capital by setting targets on profitability and capitalefficiency to generate sustainable growth and increase corporate value over the mid- to longterm? Does management clearly explain why they decided upon such targets? Does the company
achieve returns which cover the cost of capital on a mid- to long-term basis?

1

Depending upon the company, “business principles” may be described as a “vision,” “mission,” or“philosophy”.
2
In order to enhance constructive engagement between institutional investors and companies, even when acompany complies with a principle, it is beneficial for the company to proactively explain its specificimplementation activities.
3
There are many cases where a company is managed as part of a corporate group, and the Guidelines havebeen established taking such companies into consideration. In such cases, it is expected that investors willview the company in light of its corporate group status.
-1-1.3 Does the company appropriately respond to changes in the environment surrounding the business,such as increasing social demand for and interest in ESG and SDGs, progress in digitaltransformation, 4 the need to address cyber security, and the need for fair and appropriate
transactions throughout the supply chain in its management strategies and plans? Further, does
the company have a structure in place, such as the establishment of a committee on sustainability
under the board or the management side, to review and promote sustainability-related initiatives
on an enterprise-wide basis?
1.43 Does management understand the business environment and business-related risks appropriately
and make decisions decisively, such as restructuring the company’s business portfolio, including
investment in new businesses with higher growth potential and exit from or sale of existing
businesses, based on the company’s business strategies and business plans? Is a policy onreviewing a business portfolio clearly established, and is the review process effective?
2. Investment Strategy and Financial Management Policy

2.1

Are investments in fixed assets, R&D, and human resources including personnel expenses togenerate sustainable growth and increase corporate value over the mid- to long-term carried out
strategically and systematically using the company’s resources and from the standpoint ofgenerating returns which cover the company’s cost of capital on a mid-to long- term basis?

2.2

Is financial management policy (including capital structure decisions and use of cash on hand inrecognition of the company’s cost of capital) established and managed appropriately based on
the company’s business and investment strategies? In addition, does the company pursue
sustainable management and investment strategies, such as generating sufficient operating cash
flow to support the implementation of its investment strategy?

3. CEO Appointment/Dismissal and Responsibilities of the Board
CEO Appointment/Dismissal and Development

3.1

Is there an established policy on CEO qualifications in order to appoint a CEO who can makedecisions decisively to generate sustainable growth and increase corporate value over the midto long-term?

3.2

Is a qualified CEO appointed through objective, timely, and transparent procedures, deploying
sufficient time and resources? In order to make these procedures effective, is an independent
nomination committee established with required mandates and actively involved?

4

It was pointed out that in leading technological innovation toward the realization of carbon neutrality and digitaltransformation, it is important to establish a management structure such as an appointment of a chief technology
officer (CTO).
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3.3

Is a CEO succession plan appropriately established and implemented, and are CEO candidates
developed or, if necessary, selected from outside the company, systematically deploying
sufficient time and resources?

3.4

Are objective, timely, and transparent procedures established such that a CEO is dismissed when
it is determined, via an appropriate evaluation of the company’s business results, that the CEO
is not adequately fulfilling the CEO’s responsibilities?

Determination of Management Remuneration

3.5

Are objective and transparent procedures established to design management remuneration
systems such that they operate as a healthy incentive to generate sustainable growth and increase
corporate value over the mid- to long-term and to determine actual remuneration amounts
appropriately? In order to make these procedures effective, is an independent remunerationcommittee established with required mandates and actively involved? Is the appropriateness of
the remuneration system and of the actual remuneration amount clearly explained?

Responsibilities of the Board

3.6

In order to generate sustainable growth and increase corporate value over the mid- to long-term,is the board of directors constituted in a manner such that it is equipped with appropriate
knowledge, experience, and skills as a whole and ensures diversity, including gender and,international experience, work experience and age? Are there women appointed as directors?

3.7

Is evaluation of the board’s effectiveness as to whether the board fulfills its roles andresponsibilities implemented appropriately, and are the evaluation results, including issues
identified through such evaluation, clearly disclosed and explained? From the perspective ofensuring the effectiveness of the board, are each director and the statutory and voluntarycommittees properly evaluated?

Appointment of Independent Directors and Their Responsibilities

3.8

Is a sufficient number of qualified independent directors with the required qualities appointed,
in order to ensure that the board as a whole has the appropriate skills, etc.? Does the board ensure
the effectiveness of its supervision of management, including the appointment of independent
directors as the chair when necessary? Do the independent directors possess the necessary
knowledge to effectively contribute to sustainable growth and increasing corporate value overthe mid- to long-term, including knowledge of finance, such as capital efficiency, andunderstanding of relevant laws and regulations?
Are appropriate actions taken for the reappointment or retirement of independent directors,
taking into consideration the issues and changes facing the company?

3.9

Do independent directors recognize their roles and responsibilities, and provide advice and-3-monitor management appropriately in response to business issues?
Appointment of Kansayaku5 and Their Responsibilities and Ensuring Confidence of Audits andEffective Risk Management

3.10 Are persons with appropriate experience and skills as well as necessary knowledge on finance,accounting, and the law appointed as kansayaku through appropriate procedures, including theconsent of the kansayaku board?
3.11 Do kansayaku conduct business audits appropriately and act effectively to secure properaccounting audits? including discussions with the external auditor during the review process of
key audit matters? Is a sufficient support structure for kansayaku established and appropriate
coordination between kansayaku and the internal audit department ensured?
3.12 For ensuring the operational effectiveness of the whistleblowing systems, are the systems related
to the whistleblowing and the operational results disclosed and explained in an easy-tounderstand manner?

5

The contents of this section are also intended to apply to Audit Committee Members of Companies with Three
Committees and Supervisory Committee Members of Companies with Supervisory Committee. Companies
may choose one of three main forms of organizational structure under the Companies Act (Revised in 2014):
Company with Kansayaku Board, Company with Three Committees (Nomination, Audit and Remuneration),or Company with Supervisory Committee. A Company with Kansayaku Board is a system unique to Japan inwhich certain governance functions are assumed by the board, kansayaku, and the kansayaku board. Under
this system, kansayaku audit the performance of duties by directors and the management and haveinvestigation power by law (See Notes to the General Principle 4 of Japan’s Corporate Governance Code).
-4-4. Cross-Shareholdings Specific Challenges on Governance(1) General Shareholder Meetings

4.1.1 When engaging in dialogue with shareholders regarding a proposal by the company that has been
approved but a considerable number of votes have been cast against, are the analysis of thereasons behind opposing votes, the reason why many shareholders opposed, and the results ofconsideration clearly explained to the extent possible?
4.1.2 Does the company strive to disclose information included in the convening notice to give
shareholders sufficient time to consider the agenda, such as through TDnet and on the company's
website promptly after the contents are finalized?
4.1.3 Does the company consider measures to enhance constructive dialogue with shareholders, forexample, by submitting the annual securities report prior to the date of the general shareholder
meeting while recognizing that the general shareholder meetings are an opportunity forconstructive dialogue with shareholders?
In addition, does the company examine the way the general shareholder meeting is handled,including the appropriate setting of the dates related to the general shareholder meeting, so thatit can provide accurate information to shareholders even in the event of unforeseen circumstances,while ensuring sufficient time for closing and auditing?
4.1.4 If the general shareholder meeting is to be held virtually from the perspective of ensuring
opportunities for shareholders to attend and participate in the meeting, is consideration given to
ensuring the interests of shareholders? Also, are appropriate measures taken to ensuretransparency and fairness in its operation?
(2) Cross-Shareholdings
Assessment of Cross-Shareholdings

4.2.1 Does the company clearly explain the purpose of each cross-shareholding6,7 and the status of its
cross-shareholdings, including any changes in its cross-shareholdings?
Does the board assess whether or not to hold each individual cross-shareholding, specificallyexamining whether the purpose is appropriate and whether the benefits and risks from eachholding cover the company’s cost of capital? Does the company appropriately make decisions
based on such assessment? In particular, whether the assessment of holding effects is sufficient
based on the perspective of the common interests of shareholders, for example through theeffective involvement of independent directors.
6

There are cases where listed companies hold the shares of other listed companies for reasons other than pureinvestment purposes, for example, to strengthen business relationships. Cross-shareholdings here include not
only mutual shareholdings but also unilateral ones.
7
Cross-shareholdings include shares that are not directly held by a company but in practice are under thecompany’s control.
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Does the company specifically and clearly disclose and explain the results of this assessment
including the assessment methods?
Has the company established appropriate standards that are clearly disclosed with respect to thevoting rights as to cross-shareholdings? Does the company vote appropriately in accordance withthe standards?
4.2.2 As part of its cross-shareholding policy disclosure, does the company make clear its policy
regarding the reduction of cross-shareholdings, and take appropriate actions in accordance withthe policy?
Relations with Cross-Shareholders

4.2.3 When cross-shareholders (i.e., shareholders who hold a company’s shares for the purpose ofcross-shareholding) indicate their intention to sell their shares, does the company hinder the saleof the cross-held shares by, for instance, implying possible reduction of business transactions?
4.2.4 Does the company engage in transactions with cross-shareholders which may harm the interestsof the company or the common interests of their shareholders by, for instance, continuing thetransactions without carefully examining the underlying economic rationale?
5.(3) Asset Owners

54.3.1

As a pension fund sponsor, does the company take measures to improve human resources andoperational practices, such as recruitment or assignment of qualified persons (including hiring
outside experts), in order to increase the investment management expertise of corporate pension
funds (including stewardship activities such as monitoring the asset managers of corporate
pension funds), thus making sure that corporate pension funds perform their roles as asset
owners?8 Are these measures clearly disclosed and explained?
4.3.2 When managing the corporate pension funds, does the company avoid interfering with theappropriate management of its corporate pension plan, or otherwise require the corporate pension
funds to select an investment trustee from the perspective of maintaining relationships withbusiness partners?
(4) Enhancement of the Dialogue between Shareholders and Companies

4.4.1 Does the company appropriately make efforts regarding who should engage in dialogue withshareholders, for example, the appointment of the "lead independent director" in order to respondto the requests of shareholders and the main concerns of the dialogue?

8

During engagements, investors and companies need to be careful to appropriately manage conflicts of interest
which could arise between plan sponsor companies and pension fund beneficiaries as a result of these activities.
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