Key points

  • The 2021 Amendments went into effect on June 11, 2021. The principles for the prime market came into effect from April 4, 2022, when the new market segment began.
  • Additional requirements have been established for the prime market, including at least one-third of independent directors, independence of nomination and remuneration committees, English-language disclosure, electronic voting platforms, and climate-related disclosures based on TCFD, etc.
  • The skills matrix, managerial diversity, sustainability, and investment in human capital and intellectual property are amendments that are relevant not only to the prime market, but also to listed companies that are subject to all of the Code's principles.

Revisions made in conjunction with market segments reorganization

The 2021 revision cannot be understood without mentioning the April 2022 market segments realignment. The Tokyo Stock Exchange has reorganized the traditional First Section, Second Section, Mothers, and JASDAQ into three markets: Prime, Standard, and Growth. The prime market in particular was positioned as “for companies that focus on constructive dialogue with global investors.”

The revision of the Corporate Governance Code gave substance to this position. By simply changing the market segment, the difference between prime and standard is limited to market capitalization and liquidity standards. Therefore, the TSE established principles in its code that apply only to the prime market, requiring higher standards for board independence, English-language disclosure, climate-related disclosure, and the environment in which shareholders' meetings can be used.

Meanwhile, the scope of the code itself has also been organized by market. Companies listed on the Prime Market and Standard Market must comply or explain all fundamental principles, principles, and supplementary principles. Listed companies in growth markets are subject to basic principles.

Five areas that have changed with the revision

issue 2018 edition What has changed in the 2021 edition
Board of Directors Independence At least two independent directors. Companies that were deemed necessary by more than one-third of respondents were asked to disclose their policies. In the prime market, one-third or more of directors should be independent outside directors. Companies that considered it necessary were encouraged to appoint a majority. Regarding the nomination and remuneration committee, in the prime market, the majority of the members are independent outside directors.
Board of Directors Skill Composition They were asked to express their thoughts on the knowledge, experience, ability, diversity, and size of the board of directors as a whole. Revised supplementary principle 4.11.1. The revision required identification of the skills needed by the board in light of the management strategy, and that the relationship between the skills of each director be disclosed in an appropriate format such as a skill matrix. It also specified that independent outside directors should include people with management experience at other companies.
Sustainability/Climate Change Principle 2.3 touched on responding to sustainability issues, but did not provide a framework for human capital/intellectual property or specific climate disclosure. Added supplementary principle 3.1.3. Required to disclose sustainability initiatives and investments in human capital and intellectual property in a way that makes it clear how they relate to business strategy. The revision called on Prime Market companies to enhance their climate-related disclosures based on the TCFD or equivalent framework. Supplementary Principle 4.2.2 specifies the formulation and supervision of basic policies by the board of directors.
Diversity of core human resources They called for ensuring diversity, including promoting the active participation of women, but did not call for numerical targets. Added supplementary principle 2.4.1. Requested that companies publicize their approach, voluntary and measurable goals, and progress toward promoting women, foreigners, and mid-career hires to management positions. Human resource development policies and internal environment improvement policies were also subject to disclosure.
Response to overseas investors and shareholder meetings It called for the establishment of an environment for disclosure in English and the exercise of electronic voting rights in accordance with shareholder composition. The Prime Market stipulates that necessary information must be disclosed and provided in English, and that at least an electronic voting platform must be made available to institutional investors.

It is important to distinguish between principles that apply only to the prime market and principles that apply to all companies covered by the principles. Requirements unique to the prime market include having at least one-third of independent outside directors, adding independence to the nomination and remuneration committee, English-language disclosure, an electronic voting platform, and climate-related disclosure based on the TCFD. In contrast, disclosure of skills matrices, managerial diversity, sustainability policies, and investments in human capital and intellectual property are relevant to companies covered by all of the Code's principles, including the Standard Market.

More than one-third of independent outside directors

The 2021 revision is symbolized by the part of Principle 4.8 for the prime market.

"Companies listed on the Prime Market should appoint at least one-third or more of independent outside directors. (Companies listed on the Prime Market that consider it necessary to appoint a majority of independent outside directors from the perspective of realizing the functions of the board of directors required by these principles, depending on the institutional design, should appoint a sufficient number of independent outside directors.)"

  • Corporate Governance Code (2021 Edition) Principle 4.8

The 2015 and 2018 editions had a common standard of "at least two people." The 2021 revision clarifies the proportion of board members for the prime market, rather than the number of people. This is to ensure that the influence of independent outside directors does not diminish even if the size of the board of directors increases.

Furthermore, Supplementary Principle 4.10.1 stipulates that the majority of the members of the nomination committee and remuneration committee in the prime market should be independent outside directors. The revisions call for not only having independent outside directors on the board of directors, but also requiring them to be actually involved in important decisions such as selecting CEO successors and executive compensation.

Incorporating sustainability into business strategy disclosure

Supplementary Principle 3.1.3 treated sustainability as a matter of business strategy and resource allocation, rather than as an independent social contribution activity.

"Listed companies should appropriately disclose their own sustainability initiatives when disclosing their business strategies. Also, regarding investments in human capital and intellectual property, etc., they should disclose and provide concrete information in an easy-to-understand manner while being conscious of consistency with their own business strategies and management 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 profit opportunities on their business activities and profits, and improve the quality and quantity of disclosure based on the internationally established disclosure framework TCFD or an equivalent framework.''

  • Corporate Governance Code (2021 Edition) Supplementary Principle 3.1.3

This principle has three stages. First, all target companies will disclose their sustainability efforts. Second, companies explain how investment in human capital and intellectual property relates to business strategy. Third, Prime Market companies analyze climate-related risks and opportunities and enhance disclosure in line with frameworks such as the TCFD.

Subsequently, a section for sustainability information was added to annual securities reports, and progress was made in the development of SSBJ standards. The 2021 amendments served as a wake-up call for boards and investor relations departments in advance of such statutory disclosures.

Diversity from “policy” to “measurable goal”

Supplementary Principle 2.4.1 required companies to present not only a philosophy but also “voluntary and measurable goals” regarding the promotion of women, foreign nationals, and mid-career hires to management positions. The code does not specify a uniform number. This is a system in which each company sets goals according to its own situation and publishes its approach, progress, human resources development policy, and internal environment improvement policy.

At the time of the revision, the ratio of female executives in the approximately 2,220 listed companies with financial results for the fiscal year ended March was approximately 7.4%. There is a big difference between this and the government's 2023 goal of having a female executive ratio of 30% or more by 2030. Supplementary Principle 2.4.1 directly targets the managerial level, but continuous development of candidates there will lead to a human resource base for future executive officers and directors.

Code changed from 73 items to 83 items

The revised code in 2021 now has a total of 83 items, including 5 basic principles, 31 principles, and 47 supplementary principles. This is an increase of 10 items from 73 in the 2015 edition, and includes additional principles for sustainability, human capital, intellectual property, diversity, group governance, and prime markets.

More important than the number of items is the increased need to connect disclosures. For example, the skills matrix is linked to business strategy, and human capital investment is linked to sustainability policy and capital allocation. The English disclosure should not be treated as a summary of the Japanese version, but as the information base that supports dialogue with overseas investors. It became difficult to provide a convincing explanation as a whole by simply responding to each principle separately.

Application starts in April 2022

The principles for the prime market were applied at the same time as the market realignment on April 4, 2022. Even before that, companies had added director candidates, changed the composition of nomination and compensation committees, collected climate data, established English-language disclosure systems, and introduced electronic voting platforms.

The data compiled by TSE from corporate governance reports as of July 14, 2022 shows the status of compliance with each revised principle by market. "Explanation" here does not necessarily mean that the transition is delayed. The Code allows companies to specifically explain their circumstances and future policies even if they do not implement the principles.

Column: Comply or explain is not a system where you just have to comply eventually Even if a company does not implement the principles, the explanations in the code will still hold true if the reasons for doing so are appropriate to the company's circumstances and the alternative measures and future policy are clear. On the other hand, if you simply state that you will consider the decision in the future, but do not indicate the reason for the decision or the timing, it may be a formal explanation, but it will be perceived by investors as an insubstantial response. The question is not so much the choice between compliance or explanation, but rather how the board made that decision.

Practical matters that IR personnel should keep in mind

  1. Independently manage principles for prime market. For each item, such as independent outside directors, nomination and compensation committee, English disclosure, electronic voting, TCFD, etc., list the responsible department, confirmation period at the board of directors, and disclosure medium.
  2. Create a skills matrix from management strategy. Rather than listing items that are likely to apply to a director's background, first determine the abilities necessary to implement the medium-term management plan, and then indicate who will be responsible for those abilities.
  3. Connect sustainability disclosure with financial planning. Align climate, human capital, and intellectual property investments and performance metrics with business strategy, capital allocation, and risk management narratives.
  4. Diversity represents a set of goals, achievements, and development strategies. Disclose not only the policy of “emphasizing diversity,” but also current values, target values, deadlines, and the system for developing candidates.
  5. Do not limit English disclosure to translation work only. Establish a system in which overseas investors can access the same important information at the same time as Japanese documents. The mandatory disclosure in English in April 2025 is a system that strengthens the trend that started with the 2021 revision.

Source/reference materials

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