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“Practical Guidelines for Business Transformations - Toward Changes to Business Portfolios and Organizations -” Formulated

July 31, 2020

The Ministry of Economy, Trade and Industry (METI) formulated new “Practical Guidelines for Business Transformations - Toward Changes to Business Portfolios and Organizations-” based on the results of the discussions held by its Business Transformations Study Group (hereinafter referred to as the “study group”) and hereby publishes it.

1. Background and purpose

Amid dramatic changes in management environments, if Japanese companies intend to achieve sustainable growth they must concentrate their management resources in efforts to enhance core businesses or to invest in growth businesses. In this respect, Japanese companies should urgently and continuously review their business portfolios and carry out business transformations in line with best practices.

Nevertheless, most Japanese companies, while raising awareness of the need to review business portfolios, have been less active in divestments compared with mergers and acquisitions (M&A). This indicates a situation where Japanese companies are not always assessing their business portfolios in a sufficient manner.

In light of these situations, the Interim Report on the Formulation of the New Plan to Advance Economic and Fiscal Revitalization, compiled by the Future Investment Council on December 19, 2019, showed future directions where “Japan should compile guidelines concerning ideal approaches to enhancing the supervisory role of boards directors as an effort in encouraging Japanese companies to carry out their business transformations, including spin-off businesses, to improve corporate value.”

In response, METI inaugurated the Study Group (chair: Kanda Hideki, Professor, Gakushuin University Law School) in January 2020 and, since then, the study group held six official meetings from January to the end of May 2020. Also, it held comprehensive discussions on specific measures for effectively making corporate governance of Japanese companies functional through three layers of stakeholders, namely management, the board of directors/independent directors, and investors, in order to encourage Japanese companies to carry out their business transformations toward sustainable growth.

The Action Plan of the Growth Strategy, on which a cabinet decision was made on July 17, 2020, upheld a policy that “Japan should formulate practical guidelines for promoting business transformations which include spin-off businesses, and it should encourage Japanese companies to take their actions under the guidelines.” In response, METI, as a ministry in charge of corporate governance and economic policies, formulated “Practical Guidelines for Business Transformations - Toward Changes to Business Portfolios and Organizations -” by compiling the results of the discussions held by the study group.

2. Outline of the Practical Guidelines for Business Transformations

Keeping consistency with the Corporate Governance Code (hereinafter referred to as the “code”), the guidelines aim to complement the code and help Japanese companies implement corporate governance in a manner that allows their business transformations to contribute to their sustainable growth and to mid- to long-term improvement of corporate value.

On the premise of the Chapter 3 Business Portfolio Management in the "Practical Guidelines for Group Governance Systems", which was formulated on June 28, 2019, the Practical Guidelines for Business Transformations focus on, in particular, business transformations, and explain in a streamlined manner: introducing appropriate incentives to corporate management, exercising the supervisory functions of board directors, engaging with investors, establishing a system for business assessment and disclosing the results of the assessment. Moreover, the guidelines also show well-designed practical approaches to smooth implementation of divestment as best practices.

Specifically, the guidelines streamline specific efforts for making corporate governance functional for the respective three layers: management in Chapter 2, the board of directors and independent directors in Chapter 3, and investors in Chapter 4 and provide a compilation of well-designed practical approaches to smooth implementation of divestment in Chapter 5.

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