Key points

  • The TSE Corporate Governance Report consists of five parts, Parts I to V.
  • The reasons for not implementing each principle of the Code and the disclosures under each principle are primarily set out in Part I. The structure of the board of directors, committees, audits, remuneration, etc. is described in Part II.
  • If you want to read it in 15 minutes, first check the capital structure and Code compliance in Part I, then check the actual state of the board of directors in Part II, the general meeting of shareholders and IR in Part III, and internal control and other important matters in Parts IV and V.

Overall structure of CG report

A report is not just an organizational chart. You can search for what principles a company implements, what they don't, and how they explain their decisions. It is updated from time to time if there are changes to the composition of the board of directors or IR activities, so it should be thought of as a continuous disclosure that shows the company's current governance, rather than a document created only once a year.

Part I - Basic information to read first and Code compliance

The official name of Part I is “Basic Concepts, Capital Structure, Corporate Attributes, and Other Basic Information Regarding Corporate Governance”. Although the name is long, much of the information that investors see first is gathered here.

The main contents are as follows.

  1. Basic ideas regarding corporate governance - Explain what the company uses for governance and how to position shareholders and other stakeholders.
  2. Reasons for not implementing each principle of the code - If any of the basic principles, principles, and supplementary principles are not being implemented in the prime standard market, and the basic principles in the growth market, please state the reasons why they are not being implemented.
  3. Disclosures based on the principles of the Code - Describe matters that the Code requires to be disclosed, such as cross-shareholdings, board skills, sustainability, cost of capital, and shareholder dialogue, or provide references to other resources.
  4. Capital structure - State the foreign shareholding ratio, major shareholders, controlling shareholders, presence or absence of a parent company, etc.
  5. Corporate attributes and group management - Indicates market segments, fiscal year-end, industry type, number of employees, number of consolidated subsidiaries, whether parent and subsidiary are listed, and how to protect minority shareholders.

In this part, we will first look at the presence or absence of a controlling shareholder/parent company and foreign shareholding ratio. In companies with controlling shareholders, independence and protection of minority shareholders are central to understanding. Companies with a high proportion of foreign ownership tend to have higher expectations for English-language disclosure, access to shareholder meetings, independent outside directors, and explanations regarding capital allocation.

Next, we will review the reasons for not implementing the Code and the disclosures based on each principle. Not only do they "explain" which principles, but they also look at whether their explanations are more specific than those of other companies in the same industry, whether they indicate dates and who made decisions, and whether they are consistent with other disclosure materials.

Column: Foreign stock ownership ratio changes the premise of dialogue As the percentage of foreign ownership increases, the amount of information required by overseas investment management companies and voting advisory companies also increases. In addition to the availability of materials in English, it is necessary to explain in terms that foreign investors can understand, such as Japan's unique institutional design, cross-shareholdings, parent-child listings, and the authority of corporate auditors. IR personnel should keep track of the latest ratios and changes from the previous year.

Part II: Actual picture of the board of directors and supervisory system

Part II deals with “Status of the business management organization and other corporate governance systems related to management decision-making, execution, and supervision”. Read here to understand the institutional design adopted by the company and how it is structured in practice.

Items to check are as follows.

  1. Organizational design - Either a company with a board of auditors, a company with an audit and supervisory committee, or a company with a nominating committee, etc.
  2. Composition of the Board of Directors - Number of directors, term of office, chairman, number and attributes of outside directors and independent officers.
  3. Independence of outside officers ---Business relationships with the company, relationships with major shareholders and business partners, status of designation as independent officers.
  4. Nomination and Compensation Committee - Presence of a voluntary committee, composition, chairperson, ratio of independent outside directors, role and authority.
  5. Audit system - Cooperation between corporate auditors, audit and supervisory committee members, audit committee members, internal audit department, and accounting auditors.
  6. Executive remuneration - Remuneration policy, concept of fixed, performance-linked, and stock remuneration, and decision-making procedures.
  7. Reasons for choosing the current structure - Why is this organizational design suitable for your company, and what functions will the outside directors perform?

The three institutional designs differ not only in name but also in the allocation of authority. In a company with a board of corporate auditors, the corporate auditors constitute a statutory body separate from the directors. In a company with an audit and supervisory committee, directors who are members of the audit and supervisory committee participate in decisions by the board of directors. In a company with a nominating committee, etc., the nominating, auditing, and compensation committees are statutory committees. Even if the ratio of independent outside directors is the same, the effectiveness will vary depending on which organization they belong to and which decisions they participate in.

Persuasive “compliance” and “explanation”

Disclosure in accordance with the spirit of the Code is not sufficient simply by stating that the code is being implemented. It is important that the reader understands the implementation details, the decision-making body, the timing of reviews, and the connection to management strategy.

Let's compare the skills matrix in Replenishment Principle 4.11.1 with an example.

Weak compliance explanation

“We implement Supplementary Principle 4.11.1. Our Board of Directors is comprised of directors with diverse experience and abilities.”

Specific compliance explanation

“At its May 2024 meeting, our board identified eight areas of expertise needed to implement the priority measures in the FY2025–2027 medium-term plan: corporate management, finance and accounting, M&A, technology, overseas business, law and governance, sustainability, and human capital. The skills matrix on page 14 of this report shows how each director’s skills correspond to these areas. Before selecting candidates each year, the nomination committee reviews the expertise required and the composition of the current board.”

The latter includes management strategy, timing of decisions by the board of directors, classification of abilities, review body, and reference pages. Readers can see that the matrix is used to select director candidates, not as a list of backgrounds.

Next, compare the explanations for cases in which the ratio of independent outside directors in Principle 4.8 is not met.

Weak explanation

"Currently, we have not appointed more than one-third of our directors as independent outside directors. We will consider this in the future."

Specific explanation

"Out of the Company's 10 directors, three are independent outside directors, accounting for a ratio of 30%. The nominating committee is selecting candidates with a policy of adding one independent outside director at the regular general meeting of shareholders in June 2026. If elected, the ratio will be 36%. Progress will be reported to the board of directors quarterly."

Even when explaining the reasons why something has not been implemented, investors can evaluate the board's thinking by showing the current situation, reasons for the decision, alternative measures, responsible party, and timing. A concrete "explanation" may have more informational value than a statement that only concludes "compliance."

Part III: General Meeting of Shareholders, IR, Stakeholder Measures

Part III is “Implementation Status of Measures Concerning Shareholders and Other Stakeholders” and is the part most directly relevant to IR personnel.

  1. Activating shareholder meetings and facilitating the exercise of voting rights -- Early sending of convocation notices, holding meetings that avoid crowded days, electronic voting, electronic voting platform for institutional investors, English translation of convocation notices, virtual general meetings, etc.
  2. IR activities - Disclosure policy, briefing sessions for individual investors, analysts, and overseas investors, presence or absence of explanations by representatives themselves, posting of IR materials, departments and officers in charge.
  3. Stakeholder measures - Respect for stakeholders in internal regulations, environment/CSR/sustainability reporting, diversity, internal reporting system, etc.

Here, rather than whether the company states that it “emphasizes dialogue with investors,” we look at who provides explanations, to which investor groups, and how often. I would like to confirm whether information is published in Japanese and English at the same time, whether the CEO and CFO are participating in dialogue, and whether sufficient consideration time is secured before the general meeting of shareholders.

Part IV: Internal Control and Response to Anti-Social Forces

Part IV describes the basic concept and development status of the internal control system under the Companies Act, risk management, information management, whistleblowing, group company management, policies and systems for eliminating anti-social forces, etc.

The internal controls covered here are not completely the same as internal controls related to financial reporting under the Financial Instruments and Exchange Act, so-called J-SOX. The CG report focuses on the broader framework of the Companies Act, including the system for ensuring that the duties of directors and employees comply with laws and regulations and the articles of incorporation, the system for managing loss risk, the storage and management of job information, and the appropriateness of the corporate group's operations.

Normally, it is sufficient to read the summary at the end, but for companies that have had scandals, significant internal control deficiencies, or subsidiary management problems, it is worth reading this part first. Check whether measures to prevent recurrence are not limited to adding an organizational chart, and how the reporting channels and reporting to the board of directors have changed.

Part V--Takeover defense measures and organizational chart

“Others” in Part V includes the status of implementation of takeover defense measures, future governance issues, governance system diagram, timely disclosure system diagram, etc.

For companies that have adopted takeover defense measures, we look at management's evaluation of their purpose, structure, and rationality. The organizational chart allows you to understand how the general meeting of shareholders, board of directors, auditing body, voluntary committees, executive committee, internal audit, and accounting auditor are connected. A timely disclosure system diagram shows which route important information is aggregated from business departments, who makes disclosure decisions, and where it is approved.

Column - Where to get it The latest reports for each company can be searched by company name or securities code on TSE's Corporate Governance Information Service. PDFs are often posted on companies' IR sites, but for comparative research, using the TSE search service makes it easy to check multiple companies using the same format.

Steps to read in 15 minutes

elapsed time What to check
0-4 minutes Part I - Disclosure by principle of controlling shareholder/parent company, foreign ownership ratio, market segment, reasons for not implementing the code, cross-shareholdings, cost of capital, skill composition, etc.
4-9 minutes Part II - Institutional design, board of directors and independent outside directors, nomination and compensation committee, audit system, executive compensation, and reasons for choosing the current structure.
9-12 minutes Part III -- General meeting of shareholders, electronic voting, English convocation notice, briefing session, CEO/CFO involvement, IR system.
12-14 minutes Part IV—Internal Control, Risk Management, Whistleblowing, Subsidiary Management. Increase the time if there has been a recent scandal.
14-15 minutes Part V -- Takeover defense measures, governance system diagram, timely disclosure system diagram, and future challenges.

For quick comparisons, it is not necessary to read all items at the same depth. First, we narrow down the issues based on shareholder composition and code compliance, and then follow up on the board of directors, committees, and IR systems related to those issues. If there is a controlling shareholder, minority shareholder protection is required, if there are many cross-shareholdings, the principle is 1.4, if the PBR is less than 1x, the principle is 5.2, and if the overseas ownership ratio is high, English disclosure and shareholder meeting environment are required.

Practical matters that IR personnel should keep in mind

  1. Manage the CG report for disclosure at any time. Any significant changes to board composition, committees, controlling shareholders, policies, or code compliance will be amended without waiting for the annual update.
  2. Write the principle-based disclosures in Part I for investors. Instead of using fixed phrases, include the person making the decision, date, numerical value, target material, and review period. When referring to other materials, make sure that the reader can easily reach the relevant section.
  3. Align Parts I and II. If you write that “the nominating committee will oversee succession planning,” the composition, number of meetings, and roles of the committee in Part II must also support this.
  4. Eliminate inconsistencies with IR materials, annual securities reports, and integrated reports. When disclosing the same information in multiple media, such as foreign ownership ratio, independent outside director ratio, cross-shareholdings, remuneration policy, sustainability goals, etc., use the same reference date and definition.
  5. Improve based on TSE's entry guidelines and collection of good practices. Before pursuing your own unique expression, check the formal purpose and precautions for each column, and compare with best practices from other companies in your industry.

Source/reference materials

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