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The Corporate Governance System Study Group Compiled a Report

Taking into consideration new practical and legislative issues concerning corporate governance in recent times, the Ministry of Economy, Trade and Industry (METI) has continued discussions at the Corporate Governance System Study Group (chair: Mr. Hideki Kanda, professor at the University of Tokyo Graduate Schools for Law and Politics / Faculty of Law; hereinafter referred to as “the Study Group”), which resumed a series of discussions in December 2014.
METI hereby announces that the Study Group has compiled the “Implementation of Corporate Governance – Incentives and Reforms toward an Increase in Corporate Value –”

1. Background of discussions

Facing a fully globally competitive era, it has become important to increase medium-to-long-term profitability and productivity in order to improve Japanese companies’ “earning power” in Japan. Against such a background, various efforts have recently been made, including the formulation of Japan’s Stewardship Code (February 2014), the enforcement of amendments to the Companies Act (May 2015) toward securement of outside directors, and the formulation of the Corporate Governance Code (applicable from June 2015).

Also, in the Japan Revitalization Strategy (Growth Strategy) Revised in 2015, which was approved by the Cabinet on June 30, 2015, the enhancement of corporate governance is still regarded as an important issue in the further improvement of Japanese companies’ “earning power”. Thus, according to recent developments in the system such as the formulation of the codes, the improvement of the environment will be necessary to encourage the implementation of corporate governance.

Under these circumstances, the Study Group has held eight meetings since resuming discussions in December 2014, not only to formally improve governance systems but also to realize the actual implementation of corporate governance for the sake of a medium-to-long-term increase in corporate value. Based on basic concepts, including the creation of incentives for a medium-to-long-term increase in corporate value and utilization of the oversight function of boards of directors, as well as the securement of the flexibility of human resources who perform oversight functions and utilization of the roles and functions of outside directors, the Study Group has compiled this report as summarized in Section 2 below.

2. Specific outcomes from the Study Group

(1) Collection of practices of Japanese companies

In light of the commencement of the application of the Corporate Governance Code, the Study Group has compiled specific cases of the practices of the boards of directors of Japanese companies (board practices) obtained through interviews to entities including Japanese companies expecting that each company will be able to refer to these board practices when conducting independent deliberations and efforts.
Specifically, these board practices introduce criteria for selecting matters to be discussed at meetings of the board of directors of each company and cases of situations of discussions considering the introduction of outside directors.

(2) Outline of efforts taken in the U.K. and the U.S.

Examining materials disclosed by companies both in the U.K. and the U.S, this Report introduces an outline of the efforts that Japanese companies could refer to when considering efforts on corporate governance.

(3) Main points of practical deliberations on Directors’ & Officers’ Liability Insurance (D&O insurance)

In order to prevent directors and officers from excessively avoiding risks, it is necessary to further utilize D&O insurance, which insures against litigation risks. Therefore, this report presents some main points which are considered beneficial to confirm in practice when deliberating D&O insurance.

(4) Guidelines for interpretations on legal matters

From the viewpoint of the effective oversight of boards of directors, utilization of the roles and functions of outside directors, and the creation of incentives for mid-to-long-term improvement of corporate value, legal interpretations were presented on the matters described below.

  1. Matters to be discussed at meetings of boards of directors

    This Report describes the aspects to be considered when determining the scope of matters to be discussed at meetings of boards of directors and also describes how in certain cases, this scope can be regulated.

  2. Outside directors’ roles and functions, etc.

    This Report describes examples of acts that do not fall under the execution of operations, which cause outside directors to forfeit their “outsideness” in the event that they perform such acts, and concepts relating to the scope of outside directors’ obligations of supervision.

  3. Conditions for appointment of officers

    This Report articulates that it is possible to utilize “Indemnification” (*1) as one of the conditions for the appointment of officers, under certain conditions when outside directors are involved.
    Also, as for the practicalities for D&O Insurance, some portion of the insurance premiums is personally borne by officers, but this Report clarifies that under certain conditions when outside directors are involved, the total amount of the insurance premiums can be borne by the companies to which the officers belong. (*1) Indemnification: a procedure under which, in the event that officers’ liability for damages is pursued, their companies indemnify them for the amount of money that these officers are liable to pay for the said damages and costs in disputes.

  4. Introduction of new stock-based compensation systems

    Officers’ remuneration of Japanese companies has still mainly consisted of fixed pay and it has been pointed out that the percentage of performance-based remuneration or stock-based compensation in officers’ remuneration is low. In Europe and the U.S., stock-based compensation systems including Performance Shares (*2) and Restricted Stocks (*3) are broadly employed and this Report presents procedures for Japan to introduce similar mechanisms (methods for contributing claims on monetary remunerations in kind).
    (*2) Performance Shares: a stock-based compensation system under which the number of shares to be delivered varies depending on the degree to which mid-to-long-term performance targets have been achieved
    (*3) Restricted Stocks: a stock-based compensation system for delivering shares with restrictions on transfer for a certain period

Reference

Release date

July 24, 2015

Division in Charge

Corporate System Division, Economic and Industrial Policy Bureau

Related Information

Corporate Governance
Ministry of Economy, Trade and Industry
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