An unconvincing revision: Japan's new CG Code

Japan was very late to the party when it showcased its first official Corporate Governance Code in June 2015. Every other major Asian economy had done so the previous decade, some as early as 2000 shortly after the Asian Financial Crisis. Yet Japan’s delay afforded it one important benefit: the freedom to frame the code as part of the country’s economic revitalisation under the Abe administration and a way to “enhance corporate value”. This wasn’t primarily about controlling risk and restraining management like every other Asian code when they first appeared.

Over recent months the Financial Services Agency (FSA), the nation’s peak financial regulator, has been discussing a new fourth version of the code with its Council of Experts, a select group of market practitioners and academics. A draft was released for public consultation on 10 April 2026, with submissions due by 15 May 2026. The first “CG reports” aligned with the new code should be published no later than July 2027.

Despite some improvements on the last revision in 2021, and a positive emphasis on companies making more effort to internalise the spirit of the code and avoid box-ticking, we remain unconvinced this new version will achieve the governance gains the FSA intends. The policy philosophy guiding this revision is “streamlining”, very much a word du jour in international regulatory circles. The aim is a more succinct document with many fewer principles and much less prescription; one that reduces the reporting burden on companies and encourages them to focus more on “substance than form”. That is, less is more. Though in this case, we think less will be less.

The generous interpretation is that this is a bold gamble by the FSA to modernise the CG environment in Japan. Although the sub-title of the code has always been “Seeking Sustainable Corporate Growth and Increased Corporate Value over the Mid- to Long-Term”, the agency clearly believes that this message has not been fully received. A preamble has been reinserted and updated from 2015 and a phrase from that time recycled, namely that the code seeks “growth-oriented governance” rather than defensive governance that limits risk. A less generous, though probably more accurate, interpretation is that this document caters more to company management than shareholders.

What has changed?

Key issues less visible

One feature that made the Japanese CG Code interesting and rather unique was its willingness to address local governance challenges head on. Whereas codes in virtually every other Asian and many Western markets were written in a generic style, making it impossible to know which business environment they were describing, Japan’s read more like a narrative on what was wrong domestically. Key issues like the lack of corporate strategies to manage capital efficiently (and how this could harm shareholders), the need to control related-party transactions, and the risk to corporate value of anti-takeover measures were all listed as major “principles” in Section 1 of earlier versions. The first two are now subsumed under other broader principles, while the third on anti-takeover practices has been removed. All three points are also included under new “Interpretive Guidance”, but this will not be subject to “comply or explain” (see below).

The regulator is at pains to point out that this does not mean these issues are less important than before, saying it is more logical to incorporate them under Section 4 on the responsibilities of the board. Yet there is surely a danger that this is precisely how issuers will view them. Downgrading an issue from a standalone principle with its own heading to explanatory text under another principle not only represents a change of emphasis, but makes it harder for the reader to scan the code to find this information.

It is unlikely that investors will be pleased to see capital management, one of the key issues in corporate governance in Japan today, largely relegated to a subset of a principle titled “Setting Strategic Directions for Companies Business Strategies”. If whistleblowing, English-language disclosure and director training all deserve their own principle, surely capital management does too? Given the intense focus by the Tokyo Stock Exchange (TSE) on pushing issuers to focus on capital efficiency and profitability in recent years, this reworking of the code is a mistake in our view.

The new home for related-party transactions is a principle called “Effective Oversight of the Management and Directors”, while the anti-takeover principle was removed because it overlapped with other laws and regulations. As it only occupies five lines in the existing code, its deletion feels unnecessary.

There is also an inconsistency:  if overlap with other laws is the guiding objective, then large parts of the code could be removed. Yet the code is an aspirational document, not a mandatory set of rules, and complements regulation. Directors can be expected to read the 34-page code, but are unlikely to delve too deeply into the voluminous Financial Instruments and Exchange Act or the TSE Listing Regulations. The FSA has likely diluted the messaging effect of the code with these changes.

Enter “interpretive guidance”

Structurally speaking, there are two major changes to the revised code. The first is the merging of some “supplementary principles”, which provide more specific advice to boards and form the bulk of the current code, into higher level core “principles”. Both sets of principles have been subject to “comply or explain” until now. In the interests of streamlining, their number has been reduced from 83 in 2021 to just 30 in the new version.

The second, and in some ways more far-reaching, alteration is the introduction as noted of new sections called “Interpretive Guidance”. These incorporate most of the existing supplementary principles, as well as some new text, and provide the more specific advice to boards on different principles. They will not be subject to “comply or explain”.

Ostensibly taking inspiration from the UK Combined Code, which provides additional guidance to issuers in a separate document, the Japan FSA’s approach is in fact quite different.

While we are not averse to streamlining documents to remove duplication, improve language and make text more concise, the new guidance sections could lead to a material decrease in the quantity and quality of information released to investors. This is because several substantive and practical recommendations in the existing supplementary principles, as well as some new ideas, will not need to be disclosed in future CG reports from issuers.

This group covers such things as allowing investors who hold shares in custodian bank or broker nominee companies to attend AGMs even though their names are not on the shareholder register; disclosing mid-term business plans; and releasing annual securities reports at least three weeks before the AGM. Other items include progress made towards setting up e-voting platforms; whether independent directors meet separately from management; and specific procedures taken to set up whistleblowing systems. There are more.

What interpretation?

In contrast to the UK Code, which contains concrete provisions elaborating on the implementation of its principles, and is complemented by an even more detailed guidance document, much of the Interpretive Guidance in the revised Japan Code comprises high-level and general language that repeats wording from the related principle and does not elaborate in detail on the specific actions companies could take.

A new Principle 1.3 advises boards that have seen a “considerable number” of votes against certain AGM resolutions to analyse the reasons for this and take action. The guidance then merely suggests the company disclose the results of this analysis. Unlike the UK Code, the revised Japan Code does not define “considerable”. In the UK, it is 20%.

Another example is Principle 2.2 on “Ensuring Diversity”, which urges companies to “determine and disclose the status of their policies and voluntary and measurable goals for ensuring diversity, including the promotion of employees to senior positions in the company from perspectives including gender, international experience, career experience (including lateral employees), age, and cultural background”. Most of this is repeated in the brief guidance that follows.

Other principles have no interpretive guidance, such as cross-shareholdings, corporate pension funds, the importance of full disclosure, and English-language disclosure.

To be fair, some Interpretive Guidance does provide practical implementation ideas, such as under Principle 4 on the responsibilities of the board. But not a lot of this is new.

Missed opportunities

Commentators such as Nick Benes, founder of The Board Director Training Institute of Japan, have pointed out that this new version of the CG Code misses an opportunity to provide new guidance on useful governance functions such as independent board chairs and lead independent directors. Nor does it outline the proper role of the board chair, which Benes describes as remarkable given the “recent high-profile governance scandals leading to chairmen resigning at firms like Nidec and Fuji Media”. And there is no suggestion that companies should set up new committees for risk or governance, or establish term limits for directors. All these points are pertinent.

Other factors could be added. The lack of any new guidance on the functioning of advisory nomination and compensation committees at companies with traditional Kansayaku Boards or the newer Audit and Supervisory Board system. These committees lack a proper legal basis and their functions and responsibilities remain vague. As Benes notes more broadly, there is no mention of “baseline procedural rules for committees in general”.

As for new and emerging risks facing corporates worldwide, this new version of the code does touch briefly upon cybersecurity, supply chain disruptions due to geopolitical factors, changes in the global economic security environment, and IP leakage. But it does not elaborate. Curiously, it fails to mention that boards should think about artificial intelligence, the benefits and disadvantages of social media, and corporate resilience in the face of energy insecurity.

What is good

If this critique implies there is nothing good in the new version, that is not the case. The reintroduction of the 2015 preamble in updated form is a positive. Some of the old code deserved to be deleted, such as repetitive text on securing the rights of shareholders. And elements of the new interpretive guidance are welcome, in particular releasing the Yuho (annual securities report) at least three weeks before the AGM, firmer language on moving back record dates for AGMs so that they can be held later (ie, after the June rush), and analysing reasons for large votes against. Our only complaint is that these are all substantive matters that should be disclosed.

It also makes a lot of sense to combine two formerly separate principles—the rights of shareholders and dialogue with them—under one heading. As does putting greater emphasis on the expertise of independent directors by creating a new principle for it.

The box-ticking dilemma

As noted earlier, a driving factor behind the restructuring of the code is a desire to reduce formalistic governance practices and commensurately superficial disclosure from listed companies. The FSA hopes that by asking less of companies, they will do more and think harder. It is a nice idea but seems to ignore the many reasons why companies box-tick in the first place.

They do it because they can: CG codes in most markets are aspirational and non-mandatory, there is no official penalty for non- or superficial compliance, while producing boilerplate CG reports is fairly easy (just get a consultant to write them) and largely tolerated by regulators who have bigger issues to worry about.

More generously, they also do it because many governance ideas are new to management and take time to absorb. Just ask anyone who has had to reshape a board. Box-ticking is basically an essential first step for most issuers. Rather than fear or decry it, it should be seen for what it is: a necessary part of the disclosure learning curve. It is then up to the market, in particular shareholders and civil society groups, to ask companies for more meaningful information. That the FSA in Japan continues to be frustrated by this issue suggests a degree of market failure: investors in aggregate are not pushing hard enough or sufficiently rewarding issuers which disclose more.

At the micro level, there are numerous factors that contribute to box-ticking in individual companies. Disclosure policy and HR capacity—do they enable transparency? The company’s leadership and governance culture—do they care? The presence and influence of in-house counsel—are they overly cautious? There may also be frustration at the lack of response from shareholders when middle-management teams produce detailed reports. Investors have limited capacity to read governance and sustainability reports and this, in our experience, produces considerable disappointment among executives trying to do the right thing.

In short, it is hard to see how reformatting a CG code will do a lot to reduce box-ticking.

jallen@fireflyreads.com

Copyright: Ninepin Ltd 2026