The Practical Guidelines for Corporate Governance Systems (CGS Guidelines) Have Been Revised

Background

METI established the Practical Guidelines for Corporate Governance Systems (CGS Guidelines) in March 2017, in order to encourage Japanese companies to deepen their efforts toward corporate governance. It subsequently revised the guidelines in September 2018.

In order to successfully compete globally and improve their medium- to long-term corporate value, companies need to develop long-term value-creation stories and pursue investment toward innovation and growth. The following conditions will be conducive to achieving this: managers must be able to engage in entrepreneurship and follow their instincts in sound ways, leading to better management strategies and an environment which enables rapid risk taking; and listed companies must be made aware of the need to increase their corporate value.

In view of these issues, the CGS Study Group (Phase 3) was established in November 2021 and has been deliberating related matters. The CGS Guidelines have now been revised to summarize the group's discussions.

In addition, while the details on the nomination and compensation committees and succession plans had previously been presented as appendices to the CGS Guidelines, this revision has made them into an independent set of guidelines titled "Guidelines for Nomination and Compensation Committees and Succession Planning: Supplement to the Practical Guidelines for Corporate Governance Systems (CGS Guidelines)."

Key points

(1) Directions pursued in revising the guidelines

Given that governance reforms to date have called for "growth-oriented governance," we have reorganized the routes by which corporate governance reforms contribute to sustainable growth and improving medium- to long-term corporate value. The guidelines also propose that in order to enhance their corporate value by improving their governance systems, companies consciously work to strengthen both their executive functions and monitoring functions synergistically, not simply focusing on their monitoring functions alone.

The guidelines now explain that in promoting efforts toward corporate governance, companies are strongly expected to first understand the intentions and spirit of each principle in the guidelines, then autonomously devise approaches based on what they aim to achieve, and also actively explain the reasons for their choices to their shareholders and other stakeholders.

(2) Improving the roles and functions of boards of directors

In light of the considerable increase in the number of outside directors, the revised guidelines have reorganized the meaning of "monitoring," and the thinking involved in choosing a governance system and an appropriate organizational design. In addition, in light of the increasing trend toward evolving into companies with audit and supervisory committees (Kansa-tou Iinkai Setchi Kaisha), the guidelines have listed the matters to consider when a company plans to do so.

The revised guidelines also indicate the thinking involved in nominating appropriate directors based on the challenges facing the company. They also show that one option is to appoint people with knowledge and expertise regarding capital market-aware management as outside directors. In addition, when nominating "people related to investor shareholders" as directors, they have summarized the points to consider in Appendix 3 (Points of View When Nominating People related to Investor Shareholders as Directors).

(3) Quality of outside directors and their evaluation

Changes in outside directors' attitudes and awareness is important for making corporate governance reform a practical reality. The revised guidelines therefore advise that in order to raise the quality of outside directors, companies should provide and arrange training opportunities for them that suit their individual needs, and provide financial support to cover such costs.

The guidelines also advise that companies consider appointing outside directors for the majority of nomination and compensation committee member positions as well as for their chairpersons. They also present critical ideas involved in related matters, such as board succession and evaluation of outside directors.

(4) Developing an environment for strengthening management leadership

Top management's capabilities are at the core of strengthening executive functions.
The revised guidelines present best practices regarding the following: forming a top management team and transferring authority, as actions toward achieving "growth-oriented governance," which creates an internal system whereby a fully qualified president/CEO displays leadership and promotes management reform; devising approaches to formulating and executing management strategies; making use of committees to strengthen management and executive functions; remuneration for senior management; and developing human resources with executive potential and enhancing their engagement.

Related materials

• Executive Summary of the Revised CGS Guidelines(PDF:265KB)
• Practical Guidelines for Corporate Governance Systems (CGS Guidelines) (in Japanese)(PDF:1,856KB)
• Guidelines for Nomination and Compensation Committees and Succession Planning: Supplement to the Practical Guidelines for Corporate Governance Systems (CGS Guidelines) (in Japanese)(PDF:1,220KB)
• Future Issues for the CGS Study Group (Phase 3) To Examine (in Japanese)(PDF:145KB)
• Reference 1: Practical Guidelines for Corporate Governance Systems (CGS Guidelines) (Version with the Pre-Revision Text Struck Through) (in Japanese)(PDF:3,497KB)
• Reference 2: Guidelines for Nomination and Compensation Committees and Succession Planning: Supplement to the Practical Guidelines for Corporate Governance Systems (CGS Guidelines) (Version with the Pre-Revision Text Struck Through) (in Japanese)(PDF:1,263KB)

Related links

• CGS Study Group (Corporate Governance System Study Group) (in Japanese)(PDF:7KB)

Division in Charge

Corporate System Division, Economic and Industrial Policy Bureau