Written By: Junichi Takayama
Japan Equity Investment Director
Nikko Asset Management

Junichi Takayama from Nikko Asset Management looks at the benefits to investors resulting from Japan’s corporate governance and stewardship codes, the Tokyo stock exchange’s new listing rules, and increased shareholder activism

Japan used to be routinely criticised by global investors for its inflexible and outdated corporate culture. But since the Abe administration, improved corporate governance has been a central component of a sustained reform agenda. Opening Japanese companies to greater scrutiny has been steadily improving their performance and making corporate Japan significantly more competitive on a global scale.

Strengthening boardroom independence and transparency
One of the most important initiatives has been the enforcement – and evolution – of a stricter corporate governance regime. Japan introduced its Corporate Governance Code in 2015, with further revisions added in 2018 and 2021. Some of the key provisions included companies increasing the number of independent directors, full disclosure of policies, and voluntary measurable targets to appoint more women and non-Japanese professionals. These changes have borne fruit. According to TOPIX, the number of independent directors appointed to company boards has more than doubled from 19.1% in April 2015 to 39.3% in April 2022. Over the same period, the number of women boardroom appointments has increased from 5.4% to 11.6%. Greater diversity at board level is forcing previously “old-school”, male-dominated Japanese companies to embrace new talent with different perspectives.

Tokyo Stock Exchange restructuring as a catalyst
In April 2022, the Tokyo Stock Exchange underwent a significant restructuring. Its five segments (First Section, Second Section, Mothers, JASDAQ Standard and JASDAQ Growth) were restructured into three (Prime Market, Standard and Growth). Companies are now subject to a more stringent listing criteria, and are expected to adhere to specific corporate governance standards or face the prospect of being demoted or delisted. As well as disclosing investor information in English, companies listed on the Prime Market are now also expected to demonstrate their ability to have “constructive dialogue” with shareholders, and must be able to provide enhanced investor disclosure on climate change based on Task Force on Climate-Related Financial Disclosures (TCFD) or equivalent.

While the Tokyo Stock Exchange gave companies a generous timeframe to comply with the new listing rules, its “comply-or-explain” policy is clearly intended to create a more level playing field for investors over time. After the new structure was announced, many large shareholders began disposing of their shares at the request of companies, to ensure the company met the more stringent listing requirements. Management buyouts, share buybacks and full consolidation of listed subsidiaries also increased – thereby unlocking value. Moreover, the 295 companies that did not meet the requirement, but ended up getting listed on the Prime Market as a transitional measure, were required to submit plans to take corrective actions. These companies will continue to be under scrutiny by the Tokyo Stock Exchange, as well as being held more accountable by investors.

Increased shareholder activism is making great things happen
Accountability is a growing theme in Japan, encouraging shareholders to be more vocal, and sometimes even hostile, to the companies in which they invest. Although once considered taboo, shareholder activism is accelerating, and the lines between activism and stewardship are increasingly blurred since environmental, social and governance (ESG) factors have become a boardroom-level concern. For example, there has been a significant increase in shareholder activism initiatives related to human capital management, especially following the Covid-19 pandemic, where poor workplace practices were blamed for high levels of employee attrition, as well as poor output and inferior product quality. This trend of engagement on human capital issues is now a worldwide phenomenon, and Japan is no exception. The positive aspect of this is that activist investors can expect to gain significant support from institutional investors that share the same ESG-related concerns and are required by the Stewardship Code to act in the best interests of their clients. In other words, instead of being marginalised, activists in Japan now have the leverage to make great things happen.

Constructive engagement is unlocking value
Corporate engagement has come into sharp focus thanks to its positive impact on asset owners, institutional investors, and investee companies. The establishment of the Stewardship Code, one of the key pillars of the economic revival plan initiated by Abe in 2014, was a watershed in terms of changing how institutional investors interact with corporations. It encourages institutional investors to undertake “constructive engagement with investee companies” with the ultimate objective of helping to foster sustainable growth.

Research suggests that since the Stewardship Code was introduced, efforts by large institutional investors to constructively engage companies with potential areas of improvement (such as governance, low return on assets and excessive cash holdings) has had a positive impact, resulting in higher return on equity, more independent directors, and a higher proportion of shares owned by company employees¹. Within Japan’s changing landscape, engagement is also becoming a significant source of differentiation for investors. Identifying and engaging with undervalued companies on ESG-related issues such as decarbonisation, managing human capital, and enhancing governance frameworks, should improve company fundamentals, enhance corporate value and ultimately lead to higher returns.

Whereas Japan’s equity markets were historically undercut by weak institutions and brittle governance, the opposite is true today. Japan has learned that corporate reform and strong governance is an evolutionary process, and Japanese equity markets are now firmly underpinned by the country’s more mature economic foundations. A more transparent, competitive and dynamic environment is helping to build better businesses dedicated to maximising shareholder value. This value will only increase for those investors entering the Japanese market in the post-pandemic era. As the after-effects of the Covid-19 pandemic continue to fade, investors will become more focused on structural change that unlocks and builds value.


1. Source “Motivations and Effects of Engagement by Institutional Investors” [Inoue et al. 2021]


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Published: June 1, 2022
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