Appendix

The Preamble of the “Japan’s Corporate Governance Code [Final Proposal]”
The Council of Experts Concerning the Corporate Governance CodeMarch 5, 2015

Background1.

Japan's initiatives for the corporate governance system have significantly accelerated
in recent years.

2.

The Japan Revitalization Strategy approved by the Cabinet in June 2013 specified as
one of its measures the “preparation of principles (a Japanese version of the
Stewardship Code) for institutional investors in order to fulfill their stewardship
responsibilities, such as promoting the mid- to long-term growth of companies
through dialogue.” This led to discussions starting in August 2013 by the Council ofExperts Concerning the Japanese Version of the Stewardship Code established under
the Financial Services Agency, which drafted and released the “Principles for
Responsible Institutional Investors (Japan’s Stewardship Code)” (hereinafter,“Japan’s Stewardship Code”) in February 2014. Japan’s Stewardship Code iscurrently in effect.
In addition, the Legislative Council of the Ministry of Justice adopted the “Outlines
for the Revision of the Companies Act” in September 2012. Subsequently, a bill was
submitted to the Diet as an amendment to the Companies Act, including a provision
requiring companies to explain if they do not appoint outside directors. The bill was
passed in the Diet and became law in June 2014.

3.

Another measure specified in the Japan Revitalization Strategy was theencouragement of “securities exchanges in Japan to take measures that lead to theenhancement of corporate governance, for example, by clarifying listing rules
concerning the appointment of outside directors and developing new indices forcompanies that are highly evaluated for their profitability and management.” This led
to the establishment by the Japan Exchange Group, Inc. of the JPX-Nikkei Index 400,
a new stock index composed of “companies with high appeal for investors, which

1Appendix

meet the requirement of global investment standards, such as the efficient use ofcapital and investor-focused management perspectives.” The operation of this index
began in January 6, 2014.
4.

In this context, the Japan Revitalization Strategy (Revised in 2014) approved by the
Cabinet in June 2014 specified as one of its measures the establishment of “a councilof experts of which the Tokyo Stock Exchange and the Financial Services Agency
will act as joint secretariat, aiming to prepare the key elements of the Corporate
Governance Code by around autumn 2014 for the Tokyo Stock Exchange to newly
prepare the Corporate Governance Code in time for the 2015 season of generalshareholder meetings.” This led to the formation of the Council of Experts
Concerning the Corporate Governance Code (hereinafter, the “Council of Experts”)
in August 2014, with the Financial Services Agency and the Tokyo Stock Exchange
serving as joint secretariat. The Council of Experts met nine times since August, anddeveloped its basic thought on a corporate governance code as the “Corporate
Governance Code [Final Proposal]” (hereinafter, the “Code”). The Japan
Revitalization Strategy (Revised in 2014) also specified that the formulation of acorporate governance code should be based on the OECD Principles of Corporate
Governance. The Council of Experts thus engaged in their discussions by giving due
reference to the OECD Principles, and the content of the Code is based on them.
Furthermore, before finalizing the Code, the Council published an exposure draft
both in Japanese and English and has received valuable suggestions from 80
individuals/entities in Japanese and 41 individuals/entities in English. Taking thesesuggestions into account, the Council reviewed and finalized the Code.

5.

In accordance with the Japan Revitalization Strategy (Revised in 2014), the Tokyo
Stock Exchange is expected to revise its listing rules and related regulations andformulate a corporate governance code, which is expected to have the same content
as the Code.

Appendix

Objectives of the Code6.

The Code has its foundation in the Japan Revitalization Strategy (Revised in 2014 ),and is formulated as part of Japan’s economic growth strategy. As noted above, in the
Code corporate governance means a structure for transparent, fair, timely anddecisive decision-making by companies, with due attention to the needs andperspectives of shareholders and also customers, employees and local communities.
On this basis, the Code establishes fundamental principles for effective corporate
governance.

7.

It is important that companies operate themselves with the full recognition of
responsibilities to a range of stakeholders, starting with fiduciary responsibility toshareholders who have entrusted the management. The Code seeks “growth-oriented
governance” by promoting timely and decisive decision-making based upontransparent and fair decision-making through the fulfillment of companies’
accountability in relation to responsibilities to shareholders and stakeholders. The
Code does not place excessive emphasis on avoiding and limiting risk or theprevention of corporate scandals. Rather, its primary purpose is to stimulate healthy
corporate entrepreneurship, support sustainable corporate growth and increase
corporate value over the mid- to long-term.
Recognizing the board’s fiduciary responsibilities to shareholders and otherstakeholder responsibilities, the Code includes language that calls for a certain
measure of corporate self-discipline. It would not be appropriate, however, to view
them as limits on companies’ business prerogatives and activities. Indeed, quite theopposite: without appropriately functioning corporate governance, thereasonableness of management’s decision-making processes cannot be secured. Insuch a case, the management may become risk-avoiding due to concerns that their
responsibility with respect to business decisions may be put in question. Such asituation would significantly restrict decisive decision-making and companies’
business activities. By calling for appropriate corporate governance disciplines at
Japanese companies, the Code aims to have the management free from such
restrictions and establish an environment where healthy entrepreneurship canflourish and where the management’s capabilities can be given full force.

8.

Given the concerns regularly perceived about the growth of short-term investment
activities in capital markets, it is hoped that the Code will also have the effect ofAppendix

promoting mid- to long-term investing. Market participants who have the strongest
expectations for the improvement of corporate governance are usually shareholders
with mid- to long-term holdings, and they usually wait until the improvements ofcorporate governance are achieved. Notwithstanding recent concerns over the growthof short-termism in the market place, such shareholders have the potential to become
important partners for companies. The Code asks companies to examine whether
there are issues in their corporate governance in light of the aim and spirit of theprinciples of the Code, and take self-motivated actions in response to those issues.
Such efforts by companies will make possible further corporate governanceimprovements, supported by purposeful dialogue with shareholders (institutional
investors) based on Japan’s Stewardship Code. In this sense, the Code and Japan’s
Stewardship Code are "the two wheels of a cart", and it is hoped that they will work
appropriately and together so as to achieve effective corporate governance in Japan.

“Principles-Based Approach” and “Comply-or-Explain Approach”
9.

The Code specifies General Principles, Principles and Supplementary Principles. The
manner of their implementation may vary depending on industry, company size,
business characteristics, company organization and the environment surrounding thecompany. The Code’s principles should be applied in accordance with eachcompany’s particular situation.

10. Given the above, the Code does not adopt a rule-based approach, in which the actions
to be taken by companies are specified in detail. Rather, it adopts a principles-based
approach so as to achieve effective corporate governance in accordance with eachcompany’s particular situation.
This principles-based approach has already been adopted in Japan’s Stewardship
Code. The significance of this approach is found in having parties confirm and share
the aim and spirit of the principles and review their activities against the aim andspirit, not against the literal wording of the principles, even where the principles may
look abstract and broad on the surface. For this reason, the terminology used in the
Code is not strictly defined as is the case with laws and regulations. It is anticipatedthat companies that are accountable to shareholders and other stakeholders will apply
appropriate interpretations of the terminology in accordance with the aim and spiritof the Code.

Appendix

Shareholders and other stakeholders are also expected to fully understand thesignificance of this principles-based approach in their dialogue with companies.
11. Moreover, unlike laws and regulations the Code is not legally binding. The approachit adopts for implementation is “comply or explain” (either comply with a principle
or, if not, explain the reasons why not to do so). In other words, the Code assumes
that if a company finds specific principles (General Principles, Principles andSupplementary Principles) inappropriate to comply with in view of their individual
circumstances, they need not be complied with, provided that the company explains
fully the reasons why it does not comply.
12. While this comply-or-explain approach is also adopted in Japan’s Stewardship Code,it is an approach that may not yet be well known in Japan. It is necessary to bear fullyin mind that companies subject to the Code are not required to comply with all of its
principles uniformly. Shareholders and other stakeholders should also understand theaim of this approach and should fully respect the particular circumstances ofindividual companies. In particular, it would not be appropriate to consider the literalwording of each principle of the Code superficially and conclude automatically that
effective corporate governance is not realized by a company on the ground that thecompany does not comply with some of the principles. Of course, when companies
explain their reasons for non-compliance, they should do so by explaining themeasures they have taken or they will take for those non-compliant principles in amanner that non-compliance will gain full understanding from shareholders and otherstakeholders. Offering a superficial explanation using boiler-plate expressions would
be inconsistent with the concept of “comply or explain.”Appendix

Implementation of the Code
13. The Code is applicable to all companies listed on securities exchanges in Japan(hereinafter, “companies”).1 For the application of the Code to the companies listed
in the markets other than the main market (namely, the Tokyo Stock Exchange Firstand Second Sections), some consideration may need to be given to the size andcharacteristics of such companies with respect to the applicability of principles suchas governance structure and disclosure. In this respect, it is expected that the Tokyo
Stock Exchange will clarify what sorts of consideration will need to be given towhich parts of the Code for the companies listed in the markets other than the mainmarket.
14. Companies in Japan may choose one of the following three forms of corporate
organization2: Company with Kansayaku Board, Company with Three Committees(Nomination, Audit and Remuneration), or Company with Supervisory Committee.
The Code does not express a view on any of these forms of company organization. It
specifies fundamental principles for corporate governance that should be applicableto whichever form of organization a company may choose.
Given that most Japanese companies are Companies with Kansayaku Board, anumber of principles specified in the Code are drafted under the assumption that theform of Company with Kansayaku Board is chosen. It is anticipated that companies
that take a form other than Company with Kansayaku Board will apply theseprinciples by making necessary adjustments in accordance with their form ofcompany organization.
15. It is expected that the Code will enter into force on June 1, 2015, after the Tokyo
Stock Exchange takes necessary institutional steps.
Depending on their situation, there may be companies that will find it difficult tofully implement certain principles of the Code from the implementation date noted1

For overseas companies that are listed on securities exchanges in Japan, it is generally the case thathome country regulations exist and are applicable to their corporate governance. Since the content
of such regulations may differ from that of the Code, there may be cases where it will not beappropriate to apply the content of the Code as it exists. For this reason, it is expected that the Tokyo
Stock Exchange will clarify how this situation should be handled.

2

See Notes to the General Principle 4 for the explanations for these three forms of corporate
organization.

Appendix

above even if they desire to do so, such as the principles on governance structures.
In such situations, if companies undertake serious investigations and preparations forthe commencement of the Code’s application but still find immediate full compliancedifficult, these companies’ provision of clear explanations on their plans andconceivable schedule for future compliance should not be ruled out as being against
the Code.
Moreover, some principles in the Code call for disclosure or explanation, including
cases where companies are asked to “explain” the reasons for non-compliance. Since
it would be desirable that companies disclose and explain some of these matters in astandardized framework (for example, through the Corporate Governance Reportsubmitted to the Tokyo Stock Exchange), it is expected that the Tokyo Stock
Exchange will offer clarification for handling this matter.

Future Revisions of the Code

16. As noted above, while the Code establishes fundamental principles for effective
corporate governance, these principles do not remain unchanged. Under rapidlychanging economic and social circumstances, in order to ensure that the Codecontinues to achieve its objectives, the Council of Experts expects that the Code will
be periodically reviewed for possible revisions.

Appendix[Background] of the Principles in “Japan’s Corporate Governance Code [Final
Proposal]”
The Council of Experts Concerning the Corporate Governance CodeMarch 5, 2015

Supplementary Principle
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.
[Background]
Japanese companies are generally said to include a broader range of items forresolution at general shareholder meetings than companies in other countries. It is not,however, always desirable to bring all important decisions for companies before
shareholders for a direct vote. When a board is capable of adequately fulfilling its
fiduciary responsibilities towards shareholders, delegating parts of decision-making to theboard – in accordance with the Companies Act – may at times be a rational choice in order
to secure agile decision-making and expertise in business judgment. The appropriatenessof such delegation depends greatly on whether the board is adequately constituted to
execute its corporate governance roles and responsibilities.

Supplementary Principle
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.
[Background]
The following points were raised within the Council of Experts with respect to theprocedures for holding general shareholder meetings:

Appendix•

In order to ensure effective corporate governance, the period between shareholder
record date and the date of the general shareholder meeting should be as short as
possible. (For reference, the United Kingdom requires that this period be “within twodays.”)•To allow careful consideration of the agenda, the period between sending theconvening notice and the date of the meeting should be as long as possible. (Forreference, the UK Corporate Governance Code stipulates this period be “at least 20
working days.”)•

There should be a period between the closing of financial accounts and issuance ofan audit certification in order to allow for effective auditing aimed at preventing
fraud.

•

Given the above points, if necessary, one possibility that can be considered iscompanies with fiscal year-ends in March holding their general shareholder meetingsin July instead of June (existing practice). However, in order to allow shareholders
to base part of their decisions on recent earnings performance, an overly lengthy
period between the closing of financial accounts and the date of the generalshareholder meeting should be avoided.
In consideration of the above points, pushing back the provision of audited financial
information or the date of the general shareholder meeting is something that can beconsidered. In this regard, it should be noted that the delivery of timely information
through earnings releases (kessan tanshin) will become even more important and thatconsistency with other existing systems may need to be considered as well.
With respect to this issue, the public comments submitted in relation to the Code will betaken into consideration together with other views, and the Council of Experts may engage
in further discussion as needed to determine whether this issue will need to be reflected in
the final version of the Code to be issued by the Tokyo Stock Exchange.

Appendix

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.
[Background]
The above code of conduct can also be referred to as “ethical standards” or “rules of
behavior.”

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 should therefore appoint at least two independent
directors that sufficiently have such qualities.
Irrespective of the above, if a company in its own judgement believes it needs toappoint at least one-third of directors as independent directors based on a broadconsideration of factors such as the industry, company size, business characteristics,
organizational structure and circumstances surrounding the company, it should disclosea roadmap for doing so.
[Background]
While there is a range of debate with respect to independent directors, it would not be appropriate
to think that the mere appointment of independent directors will drive corporate growth. Rather,success will depend on whether measures are taken to take advantage of the presence of independent
directors and their expected roles and responsibilities. The Companies Act (Revised in 2014) andListing Rules already refer to the appointment of one or more independent/outside directors, with many
companies adopting these provisions. The Code specifies that at least two independent directors
should be appointed, taking the perspective that having multiple independent directors will
significantly enhance the possibility that their presence will be fully leveraged.
It was noted at the Council of Experts that there are some organizations that undertake the collection,
updating and provision of information on candidates for independent directors to support their readyappointment and that it would be desirable for such activity to be broadly promoted.

Appendix

Supplementary Principle
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.
[Background]
The meetings can consist solely of independent directors or can also include
independent kansayaku1.

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.
[Background]With regard to the independence criteria and related disclosure requirements established by
securities exchanges, there is a view that their content is abstract and that they present considerable
room for interpretation. While on the one hand there is a favorable view that this ensures flexibility inapplying the criteria, it is also noted that the varying interpretations of the exchange criteria by
institutional investors and proxy advisors results in the adverse effect of companies applying thesecriteria too conservatively. Moreover, Japan’s exchange criteria differ from those of other countries
in several regards. The Council of Experts expects that, while taking into account future developments,
securities exchanges will undertake appropriate reviews as necessary.

1

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

Appendix

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
and remuneration of the senior management and directors, the company shouldseek appropriate involvement and advice from independent directors in theexamination of such important matters as nominations and remuneration by, forexample, establishing optional advisory committees under the board to which
independent directors make significant contributions.
[Background]With respect to the expected roles and responsibilities of a board in providing explanations
and performing effective oversight, the importance of functions related to audit, nomination
and remuneration has been noted. In many other countries decisions in these areas are seen
to require a particularly independent and objective standpoint. As a means of strengthening
the independence and objectivity of such functions (excluding audit functions that can befulfilled by the kansayaku board or by the supervisory committee), the use of an advisorycommittee, for example, can be considered. With respect to Companies with Supervisory
Committee, the supervisory committee can be used to full advantage, given that the committee
has the statutory right to state its opinion in relation to nominations and remunerations of
directors at general shareholders meetings. A variety of measures can be taken, taking into
consideration the specific circumstances of individual companies; for example, a variety ofcorporate governance-related matters (e.g. related party transactions or nomination ofkansayaku candidates) can be reviewed at the advisory committee