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Practical Guidelines for Corporate Governance Systems (CGS Guidelines) Revised

September 28, 2018

In light of the recommendation submitted by the 2nd-Term Corporate Governance System (CGS) Study Group (hereinafter referred to as the “study group”), the Ministry of Economy, Trade and Industry (METI) revised the Practical Guidelines for Corporate Governance Systems (CGS Guidelines). METI hereby released the revised CGS Guidelines.

1. Background

In March 2017, METI formulated the CGS Guidelines, a collection of significant matters that are considered useful for Japanese companies to take into consideration, from the perspective of encouraging such companies to advance their initiatives for better corporate governance.

As part of the follow-up efforts involving the CGS Guidelines, in December 2017, METI conducted a questionnaire survey targeting listed companies and also established the study group. Following this, the study group evaluated the current status of the corporate governance reform and discussed challenges in improving its effectiveness, with an eye on the revision of the Corporate Governance Code (hereinafter referred to as the “code”) in June 2018.

In May 2018, the study group compiled the discussion results into an interim report. In response to the recommendation in the report, METI revised the CGS Guidelines concerning the matters deemed significant in advancing corporate governance reform from the stage of formality to the stage of substantiality.

2. Outline of the revised guidelines

Highlights of the revised guidelines are as follows:

(1) Appointment of the president and CEO, etc. and plans concerning their successors

As Japanese companies are facing an era in which business environments change in a non-continuous and destructive manner and business challenges are increasing in complexity, they are raising awareness of the importance of the roles that business top management should play and that of securing talented business successors who are able to play such roles. Against this backdrop, METI revised the full descriptions concerning the appointment of the president and CEO, etc. and plans concerning their successors and streamlined anew the importance of such appointment and plans and the significance of securing objectivity and transparency therein.

Moreover, METI newly formulated Appendix 4 to the CGS Guidelines titled “Viewpoints Taken in Formulating and Operating Plans Concerning Successors to the President and CEO.” The appendix streamlined key points, such as seven basic, standard steps that companies should take in formulating and operating such plans, ideal approaches to sharing roles between inside and outside personnel, and mindsets for preparing such plans, for e.g., the need to make plans visible by words or documentation. The appendix also explains case examples of leading companies.

(2) Chair of a board of directors

The CGS Guidelines describe additional key points for companies that prioritize supervisory functions of a board of directors, such as the significance of appointing a person other than executing persons, for e.g., outside director, to serve as a chair of a board of directors, and that of developing an environment therefor.

(3) Utilization of a nominating committee and a compensation committee

The revised code requires companies to establish a nominating committee and a compensation committee in principle. In line with this, the CGS Guidelines additionally define that companies should compose such committees with outside directors as members in principle, and that based on this, they should take into consider whether or not [i] at least the majority of members of such committees consists of outside directors, or [ii] the chairs of such committees are outside directors as for the case where the number of inside and outside directors is the same.

(4) Utilization of outside directors

The CGS Guidelines explain that outside directors should ensure the required quality and background to play a substantial role and function, and additionally show the following important points:

Moreover, concerning the reappointment of outside directors, the guidelines additionally present the significance of setting the upper limit of the period of taking office and the establishment of certain standards for the reappointment as an element that companies should consider.

Furthermore, the CGS Guidelines offer recommendations that such outside director who has experienced business management, e.g., retired presidents or CEOs, should accept offers from other companies to assume the post of outside director, considering the aspect of expanding the human-resource markets concerning outside directors.

(5) Advisors or consultants

In addition, the CGS Guidelines explain that in cases where companies decide to select internal advisors or consultants from among those who have experienced the position of president or CEO, such companies are expected to proactively make efforts for conveying information on certain facts of this selection of the advisors or consultants, e.g., their number, roles or treatments.

3. Future schedule

In collaboration with Keidanren and other industrial associations, METI will strive to disseminate and popularize the revised guidelines.

Appendix

Division in Charge

Corporate System Division, Economic and Industrial Policy Bureau

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