Background and Purpose

The Japanese government defines corporate governance as “a foundation for companies to build and execute mid-to-long-term growth strategies with competitive advantages, aimed at strengthening their ‘earning power’ and pursuing ‘proactive management.'” In 2013, the government positioned the strengthening of corporate governance as a crucial issue in its “Japan Revitalization Strategy,” and in its 2014 revision explicitly stated that the Tokyo Stock Exchange would establish the Corporate Governance Code (hereinafter “CG Code”). Accordingly, the Financial Services Agency and the Tokyo Stock Exchange established an expert committee to draft the original proposal, which was officially implemented by the Tokyo Stock Exchange in June 2015. The CG Code is defined as “a mechanism for companies to make transparent, fair, prompt, and decisive decisions based on the perspectives of shareholders, customers, employees, local communities, and other stakeholders.” Since its implementation, the CG Code has undergone two revisions (2018 and 2021).

Basic Characteristics of the CG Code

The CG Code has two main characteristics:

1. Comply or Explain Principle
   The CG Code is not law and carries no legal binding force. Instead, the Tokyo Stock Exchange’s listing rules adopt the “Comply or Explain” principle. Companies must either comply with the principles or explain their reasons for non-compliance in their “Corporate Governance Report.”
2. Principle-based Approach
   Rather than adopting a detailed “rule-based” approach, the CG Code takes a “principle-based” approach, using abstract expressions and content to allow companies to implement effective corporate governance according to their circumstances, providing broader room for interpretation.

Content and Key Revisions of the CG Code

The CG Code consists of a three-tier structure: “General Principles” and their associated “Principles” and “Supplementary Principles.” The “General Principles” (first tier) include five items:

1. Securing the Rights and Equal Treatment of Shareholders
2. Appropriate Cooperation with Stakeholders Other Than Shareholders
3. Ensuring Appropriate Information Disclosure and Transparency
4. Responsibilities of the Board
5. Constructive Dialogue with Shareholders

Based on these General Principles, 31 “Principles” (second tier) and 47 “Supplementary Principles” (third tier) have been systematically established. Additionally, the scope of comply-or-explain requirements varies among different market categories (Prime Market, Standard Market, and Growth Market).

The CG Code covers a wide range of content, with the 2021 latest revision particularly emphasizing the following points:

1. Board Functionality Enhancement
   • Requiring the appointment of at least two independent outside directors. Furthermore, companies listed on the Prime Market must ensure that independent outside directors comprise at least one-third of their board members.
   • Requiring the disclosure of a Skill Matrix, which shows “the correlation between the skills (knowledge, experience, and capabilities) that the board should possess based on management strategy and the skills of each director.”
2. Ensuring Core Talent Diversity
   • Requiring disclosure of perspectives on management-level diversity (appointment of women, foreign nationals, and mid-career hires), measurable voluntary targets, and their progress.

Practical Challenges and Future Outlook

The CG Code has been in effect for ten years. Some observe that companies are paying more attention to investors’ voices, and there has been an increase in both the adoption of the “company with committees” system, which provides stronger board oversight, and the number of outside directors. However, others point out that as revisions make regulations more detailed, companies are merely making formal responses, and there should be a stronger focus on returning to the original objectives: enhancing “earning power” and promoting “proactive management.”

The Financial Services Agency plans to conduct a revision after five years in mid-2026, currently considering ways to strengthen corporate earning power. Meanwhile, in April 2025, the Ministry of Economy, Trade and Industry released findings from its “Study Group on Strengthening Earning Power,” including the “Five Principles for Boards to Strengthen Earning Power” and “Corporate Governance Guidance for Strengthening Earning Power.” Japan’s corporate governance development is moving from system establishment to the next phase, and its future developments warrant attention.