Keep your eyes on the prize

When Japan introduced its new “Stewardship Code” in 2014, the first in Asia, it was rightly hailed as a landmark development for CG reform in the country. Institutional investors, both domestic and foreign, were now expected to engage with companies on strategic issues of governance and business, not merely buy, sell and vote their shares. The big question at the time, though, was ‘what is corporate governance?’ What did best practice look like? What goals should companies strive for and investors judge them against? 

The problem was that Japan did not have an official code of best practice on corporate governance (“CG code”). First out of the stewardship gate in the region, it was last among major Asian economies in terms of creating a CG code. Powerful old school interests had helped stymy previous efforts towards a code and successive governments had never given the Financial Services Agency (FSA), the country’s peak financial regulator, the political backing to move forward. But this all changed with the arrival of the Shinzo Abe government in late 2012 and his promise of economic revitalisation and structural reform.

Japan duly got its first CG code in June 2015 and investor stewardship had a clearer framework in which to operate. Yet by then another problem had emerged: existing financial law conflicted in important respects with the Stewardship Code and constrained what investors could do, or felt they could do. 

This was because a key part of the Financial Instruments and Exchange Act (FIEA) dealing with large shareholders and concert-party behaviour put some strict guardrails around how investors could behave. 

Investors with stakes of more than 5% in a listed company could potentially be prosecuted if they undertook company engagement and breached a sweeping rule mandating  disclosure of "material proposals" made to a company. Those with holdings of less than 5% could also run afoul of the law if they were deemed to be acting jointly on a company issue and did not disclose this fact. Vague definitions in the law as to what was permitted or prohibited created uncertainty in the market and dampened investor willingness to engage, especially collectively.

After a decade of investor lobbying, the Japanese government took a major step forward in May 2024 when it amended the FIEA to align it with the Stewardship Code and more explicitly facilitate collective engagement. In August 2025, the Financial Services Agency (FSA), the country's peak regulator, published a Q&A outlining the key changes and how investors should apply them in different scenarios. The new regime comes into force at the beginning of May 2026 and will remove many of the most heavy handed features of existing rules. 

The big changes

In a nutshell, the new regulations liberalise what investors can say to companies without having to report, especially around routine issues of governance, board composition, dividends and significant changes in capital policies. They introduce a sensible new litmus test for judging whether a proposal made to a company is material under the law: does management have ultimate autonomy to decide what to do?  If they do, then the proposal is categorised as not material enough to be disclosed by the investor. If they do not, such as when a shareholder puts forward a resolution to an AGM, then the proposal is material enough to be disclosed. This is because in these instances management has no choice but to allow the proposal to be put to a vote. 

The new rules also loosen the constraints on concert-party behaviour (called “joint holders” in Japan). A key new element is the “Collaborative Engagement Exemption”, which pragmatically recognises a number of scenarios where investors in a group will not be deemed to be joint holders.

Grey areas

Like much regulation in Japan, the amended law has its share of grey areas. Perhaps the biggest is the new list of material proposals, divided into “large impact items” and “small impact items”. The former are things likely to have a sizeable impact on the business activities of a company and limit management’s ability to act autonomously. The latter are broadly the opposite. What investors will find confusing is that some items are in both lists, such as mergers/demergers and the transfer, suspension or abolition of part or all of a business. 

Going forward it would help if the FSA provided clearer definitions as to what these ostensibly overlapping items mean. Or it could send a signal to the market that it will give investors the benefit of the doubt when they are experimenting with the new rules in areas like business restructurings, reduction of cross-shareholdings, and similar issues deemed vital to creating more corporate value in Japan. In other words, a type of safe harbour. Areas where the new rules are crystal clear, such as nominating a specific person to be a director, would not need such a hands-off approach.

Questions and doubts

One big question is why are these new rules needed at all? Shareholders already make public any proposal they make to an AGM or EGM. They are required to inform the company, which in turn informs the market through its shareholder meeting notice. Those making proposals also publicise their campaigns to garner voting support. Indeed, many of the items in the large-impact list would be made public as a matter of course.

Our preference would be to allow investors to discuss any topic with companies under the large shareholder system without triggering a reporting obligation, thus allowing a deeper and richer two-way communication. A disclosure obligation would only arise if investors planned to take tangible legal action to force change upon a company, such as putting forward a proposal at an annual shareholder meeting, calling an EGM, or launching litigation. Or if companies inadvertently disclosed any material non-public information. Both requirements already exist.

Yet tradition and politics weigh heavily. The authorities clearly would not accept wholesale change in this area of regulation, while conservative business groups would push back. The FSA has already expended considerable political capital and staff resources on these amendments and, for now, has gone as far as it can. It also coupled them with new rules on disclosure of beneficial ownership, allowing companies to know who all their shareholders are and not just those with more than 5%. A classic balancing act.

Another reason is that the rules have value for policymakers and companies. It helps them to keep an eye on activists—not to deter them, but to let the market and management know they are coming and what their intentions might be. Elliott’s recent move on Toyota Industries in November and December 2025 will only reinforce this thinking.

Our concern, however, is not with the activists—who need little prodding to promote their own interests—but with mainstream investors.

We believe that the new rules will provide most encouragement to investors who take company engagement seriously and are willing to collaborate with peers on core issues of governance and business strategy. In Japan, this group broadly includes foreign active managers, principally members of the Asian Corporate Governance Association and the International Corporate Governance Network, and some domestic passive houses which are part of the Institutional Investors Collective Engagement Forum. It generally does not include foreign passive managers and most domestic active funds. In other words, large parts of the investment industry may not make much use of the new rules—at least over the medium term. And US passive funds will likely maintain the status quo for as long as anti-ESG sentiment persists in their country. 

We also fear that investors looking for a reason not to engage companies either too deeply or collectively will find ample excuses in the fine print of the new law. The overlap between the large- and small-impact material proposal lists will probably be their starting point. The presumption of the Stewardship Code is that every fund should be a steward. But not everyone wants to be, or has the budget to do the job properly. In-house counsel at investment funds, many of whom are famously risk-averse, will find lots to worry about and nitpick over.

It goes without saying that shareholders should understand the new rules in detail and take them seriously. At the same time the savvier ones will keep their eyes on the main prize—the gift of a range of new tools to engage companies and which ultimately should lead to stronger listed-company governance and better returns. They will also remember that the FSA has rarely, if ever, prosecuted any investor for telling companies what to do.

Copyright: Ninepin Ltd, 2026

Coming next: A two-part explainer on how the large shareholder reporting system and joint holder rules have been amended.