The revised Guidelines with track changes
from the previous version of the Guidelines

Provisional translation

Guidelines for Investor and Company Engagement

Financial Services Agency
Original Code: June 1, 2018
First Revision: June 11, 2021

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 forthe Japanese people.
The Guidelines are intended to be a supplemental document to the Stewardship Code and theCorporate 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”.
2In 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.
3There 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 as well as the response to changes surrounding international economic security
environments 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 capital including personnel expenses
to generate sustainable growth and increase corporate value over the mid- to long-term carriedout 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

4

It was pointed out that in leading technological innovation toward the realization of carbon neutrality anddigital transformation, it is important to establish a management structure such as an appointment of a chief
technology officer (CTO).
-2-nomination committee established with required mandates and actively involved?
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-3.9

Do independent directors recognize their roles and responsibilities, and provide advice andmonitor 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 ofkey 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 beenapproved 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'swebsite 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 toensuring 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.
6There 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 assetowners?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 Companies4.4.1 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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