Japan FSA Set to Revise Corporate Governance Code

New code will require listed companies to have more independent board directors, promote management diversity, and improve environmental disclosures.

Japan’s Financial Services Agency (FSA) is reportedly preparing revisions to its corporate governance code that may require listed companies to allocate at least a third of their board seats to independent directors.

According to the Financial Times, FSA commissioner Ryozo Himino said the review of the code will have three pillars: strengthening the role of boards, making core management more diverse, and improving disclosure on the environment.

“For example, to improve board effectiveness, we might ask that all prime-listed companies have one-third independent directors, or depending on the company’s circumstances more than half,” he said. “Some people also want us to go beyond just the proportion and look at the role of independent directors and how they can be more effective.”

The code was first published in March 2015 as part of efforts by former prime minister Shinzo Abe to raise the focus on shareholders’ interests at Japanese companies. It follows the principle of “comply or explain”, requiring companies to meet the rules or explain why they have not done so.

Himino said there have been significant changes in governance since the Abe reforms began, including improved return on equity and reduced cross-shareholdings.

However, he notes that many companies have been unable to comply with code provisions calling for greater management diversity, saying they are unable to find suitable executives who are not middle-aged, male, Japanese and lifetime employees of the company. Rather than insisting that listed companies find such people, the new code will push to train them, Himono said.

“The point is to say please set your own target for raising diversity in terms of gender, nationality, mid-career employment or whatever else, and then publish your progress towards it.”

Himino is also responsible for Tokyo’s effort to lure more bankers, asset managers and investment capital from Hong Kong. “I’ve spoken with lots of foreign financiers in Tokyo and they usually have three complaints: regulation, tax and immigration,” he said.

The FSA has been working to increase the services it provides in English and the government is working to make the tax system more foreigner-friendly.

From April, foreign residents will no longer be liable to Japanese inheritance tax at rates of up to 55 percent on their worldwide assets if they die in Japan, Himono said. “Of course we can’t just reduce all the tax rates to 18 percent, but we’re responding to all of the areas where there are strong opinions.”

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