Key points

  • The Corporate Governance Code sets out the principles and disclosure framework required of listed companies. In contrast, various guidelines from the Ministry of Economy, Trade and Industry provide detailed procedures and points of focus that boards and committees should consider in practice.
  • In principle, the Ministry of Economy, Trade and Industry's guidelines are not subject to a "comply or explain" policy and are not legally binding. Still, it has a significant practical impact, as it is used as a common reference by companies, investors, proxy advisory firms, and legal and financial advisors.
  • The CGS Guidelines for succession planning, the Group Guidelines for listed subsidiaries, the Fair M&A Guidelines for MBOs and acquisitions by controlling shareholders, and the Guidelines for Corporate Takeovers for unsolicited acquisitions are central materials that supplement the Code.

What is the difference between the Code, Companies Act, and Practical Guidelines?

Japan's governance system is not complete with just one document. At least the following three parts should be read separately.

The first is corporate law. Establishing the legal basis for company operations, such as directors' duties, company institutional design, shareholder meetings, and organizational restructuring. The Ministry of Justice is in charge, and violations may result in legal liability.

The second code is the Financial Services Agency/Tokyo Stock Exchange code. The Corporate Governance Code sets out the principles of behavior expected of listed companies, and the Stewardship Code sets out the principles of behavior expected of institutional investors. Listed companies will explain whether they have implemented the applicable principles and, if not, why. The company's main disclosure medium is the Corporate Governance Report.

The third is the Ministry of Economy, Trade and Industry's practical guidelines. The Guidelines are not a mechanical restatement of the principles of the Code. We delve into what issues to consider and in what order in situations such as board composition, CEO succession planning, conflicts of interest in listed subsidiaries, MBOs, and unsolicited acquisitions. Although it is neither a law nor a listing regulation, it has become established as a common language when explaining the fairness of procedures and the decision-making process of the board of directors.

Column: Don't simplify it by saying "there are two competent authorities" If we view governance only as “the Financial Services Agency versus the Ministry of Economy, Trade and Industry,” we get the whole picture wrong. The Ministry of Justice, which is in charge of corporate law, the Tokyo Stock Exchange, which administers listing rules, the Financial Services Agency, which is responsible for regulating investors, and the Ministry of Economy, Trade and Industry, which formulates practical guidelines for corporate management and M&A, all play different roles. In practice, the basic reading is to confirm the legal minimum in the Companies Act, to cover disclosure expectations in the code, and to supplement specific procedures with practical guidelines.

Four major guidelines published by the Ministry of Economy, Trade and Industry

1.CGS Guidelines

The official name is Practical Guidelines for Corporate Governance Systems. The first edition was published in March 2017 and revised in September 2018 and July 2022.

These guidelines cover issues such as the role of the board of directors, the division of business execution and supervision, the use of outside directors, nomination and compensation mechanisms, CEO appointment/dismissal, and succession planning. While the Code states the principle that “the board of directors should appropriately supervise succession planning,” the CGS Guidelines delve into practical issues such as setting candidate images, candidate development, involvement of the nominating committee, and role sharing with the current CEO.

In the 2022 revision, the sections related to nomination, remuneration, and succession planning have been organized as “Guidelines for Utilizing Nomination Committees, Compensation Committees, and Succession Plans - Practical Guidelines for Corporate Governance Systems (CGS Guidelines) Separate Volume”. The revised version focuses on the perspective of not only increasing the supervisory function of the board of directors, but also increasing the appropriate risk-taking and execution capabilities of management.

2. Group guidelines

The official name is Practical Guidelines for Group Governance Systems and was published on June 28, 2019. He deals with the overall design of corporate groups, the allocation of authority between parent companies and subsidiaries, internal controls, business portfolio management, and conflicts of interest in listed subsidiaries.

Most importantly, parent companies with listed subsidiaries are encouraged to continually consider whether keeping the subsidiary listed makes sense for both the group as a whole and the subsidiary's minority shareholders. Listed subsidiaries are also required to utilize independent outside directors and special committees to manage conflicts of interest associated with transactions with parent companies and organizational restructuring.

This is not a guideline to “uniformly eliminate parent-child listings.” The idea is that if a company wants to remain listed, it needs to explain the reasons and benefits and put in place a mechanism to protect minority shareholders.

3. Fair M&A Guidelines

The official name is “Guidelines for Fair M&A - Toward Improving Corporate Value and Securing Shareholder Returns” and was announced on June 28, 2019. The 2007 MBO guidelines were completely revised, and in addition to MBOs, they also focused on transactions in which a controlling shareholder acquires a listed subsidiary.

These transactions create structural conflicts of interest between the buyer and the target company's management, or between the controlling shareholder and public shareholders. The guidelines indicate the following measures to ensure fairness in order to limit this impact.

  • Establishment of an independent special committee
  • Obtaining advice from external experts, valuation reports, and fairness opinions as necessary
  • Market check to secure proposal opportunities from parties other than the acquirer
  • Full disclosure of information regarding transaction terms and negotiation process
  • Consideration of majority-of-minority conditions depending on the nature of the transaction

These are not uniform checklists that should be applied in the same way in all cases. This is a framework for determining which combination of measures will ensure fair procedures, depending on the degree of conflict of interest in a transaction and the market environment.

4. Guidelines for Corporate Takeovers

“Guidelines for Corporate Takeovers” was published on August 31, 2023. The target is an acquisition that acquires management control of a listed company. Based on the 2005 Guidelines on Takeover Defense Measures and the 2008 Corporate Value Research Group Report, the focus of the discussion shifted from ex-ante defensive measures to the decision-making process of the board of directors that receives a takeover proposal.

The guidelines emphasize three principles: ensuring or improving corporate value and the common interests of shareholders, respecting shareholder will, and ensuring transparency. The target company's board of directors is required to collect the necessary information and seriously consider it while comparing it with other options, rather than arbitrarily rejecting a sincere takeover proposal that has the potential to increase corporate value.

Therefore, the turning point in the guidelines was not that “hostile takeovers were welcomed.” Rather than assuming that a proposal is inappropriate just because it was unsolicited, they asked for a concrete evaluation of the content of the proposal, post-acquisition management policy, price, feasibility, etc.

In July 2026, the Ministry of Economy, Trade and Industry published points, Q&A, and an interpretation document of the guidelines, supplementing the practical thinking from receiving and considering takeover proposals, handling competing proposals, and information disclosure.

Compare codes and guidelines by issue

issue corporate governance code Contents supplemented by the guidelines of the Ministry of Economy, Trade and Industry
CEO succession plan Supplementary Principle 4.1.3 requires boards to appropriately oversee CEO and other succession planning and to be involved in ensuring that sufficient time and resources are devoted to the development of candidates. The CGS Guidelines and the 2022 supplement will specify the candidate image, formation, training, and evaluation of candidate groups, the role of the nominating committee, and the division of labor with the current CEO.
Governance of listed subsidiaries The 2021 version of Supplementary Principle 4.8.3 requires companies with controlling shareholders to increase the proportion of independent directors or to establish an independent special committee. The Group Guidelines provide details on the parent company's consideration of the rationality of maintaining its listing, the management of parent-subsidiary transactions, the role of the subsidiary board of directors and special committees, and the protection of minority shareholders.
MBO/Acquisition by controlling shareholder Principle 1.7 deals with the management of related party transactions, but does not exhaustively prescribe procedures for MBOs or acquisitions by controlling shareholders. Fair M&A Guidelines organize measures to ensure fairness, such as special committees, external advice, valuation, market checks, and information disclosure.
Unsolicited takeover/takeover defense measures Principle 1.5 requires explanations of the necessity and rationality and consideration of shareholder rights when introducing and operating takeover defense measures. The Guidelines for Corporate Takeovers organizes the board of directors' consideration of a serious takeover proposal, provision of information to shareholders, counterproposals, and defensive measures based on three principles.

How to read them in practice

In practice, it will be easier to organize if you read them in the following order.

  1. Check the laws and regulations first. Observe legally required procedures such as director authority, shareholder meeting resolutions, organizational restructuring, and tender offers.
  2. Next, check the code. Find out what principles apply to your company and what you should explain in your corporate governance report.
  3. Then read the relevant practice guidelines. Specify which issues should be considered by the board of directors and special committees, and how the decision-making process should be recorded and disclosed.
  4. Combine according to the unique circumstances of the project. Rather than formally adopting all guidelines, choose the necessary measures depending on the magnitude of the conflict of interest, shareholder composition, urgency of the transaction, possibility of alternative proposals, etc.

Column: “Not legally binding” does not mean “can be ignored” Non-compliance with the Practical Guidelines alone does not immediately result in a violation of laws and regulations or listing rules. On the other hand, if the measures to ensure fairness specified in the guidelines are not taken, the board of directors or special committee will need to explain why they have determined that sufficient fairness can be ensured through other procedures. The effectiveness of guidelines comes not from sanctions, but from common standards for comparing and evaluating decision-making processes.

Points to consider when reading primary sources

When reading group guidelines, rather than just looking for a conclusion: “Should the subsidiary remain listed or take it private?” look at how often the parent company considers the rationale for remaining listed and how it requires the subsidiary to ensure independent decision-making.

Under the Fair M&A Guidelines, it is important not only whether there is a special committee, but also when it was established, whether the committee members were independent, whether they were substantively involved in the negotiations, and whether they obtained the necessary information and advice. Merely establishing a committee as a formality does not ensure procedural fairness.

The Code of Conduct for Corporate Acquisitions examines whether the board of directors is jumping to conclusions on behalf of shareholders and whether it has provided necessary comparative information to shareholders, rather than whether the proposal is "friendly" or "hostile." The key points/Q&A for 2026 are useful as supplementary materials when applying the three abstract principles to project practice.

Implications for IR practice

  1. Be able to read not only the code but also the guidelines for each project. For succession planning, publicly traded subsidiaries, MBOs, and unsolicited acquisitions, the Code alone does not provide the procedural information boards need.
  2. For MBOs and acquisitions by controlling shareholders, refer to the Fair M&A Guidelines from the beginning of the transaction. Establishing a special committee as an afterthought will not restore independence to the negotiation process. IR also needs to be involved from the procedure design stage, not just before disclosure.
  3. Companies that maintain parent-subsidiary listing will specifically explain the benefits of listing. In addition to general considerations such as “name recognition” and “recruitability,” it also shows what kind of benefits there are for the parent company, subsidiaries, and minority shareholders.
  4. If deviating from the guidelines, explain alternative procedures. Rather than omitting explanations because it is non-binding, disclose the unique circumstances of the case and the reasons why fairness was ensured through other means.
  5. Follow up to study group materials. Before the guidelines are revised, the points at issue will be sorted out by a study group of the Ministry of Economy, Trade and Industry. By reading the minutes, secretariat materials, and committee members' opinions, you can quickly grasp the upcoming system changes and market interest.

Source/reference materials

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