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Japan to require listed companies to disclose executive pay rules

Financial watchdog aims to improve corporate governance after Nissan scandal

New rules to be introduced in Japan next year will require companies to disclose the ratio between executives' fixed pay and performance-related pay. (Photo by Ken Kobayashi)

TOKYO -- Japan's Financial Services Agency will require listed companies to disclose the procedures they use to determine executive compensation.

The details companies will need to publish include the ratio of performance-linked pay within overall compensation packages and the specific bench marks on which executives' performance is measured.

The handling of executive pay has come under the spotlight since the arrest of former Nissan Motor Carlos Ghosn on suspicion of underreporting pay on Nov. 19.

The measures are aimed at improving transparency in order to facilitate assessment by shareholders and other external parties.

The new rules will be introduced through amendments to the Cabinet order related to the Financial Instruments and Exchange Act. They come into effect in the year ending next March, when companies whose fiscal year ends then will be required to indicate certain details in their securities reports.

Currently, listed companies are only required to disclose the names of executives whose compensation exceeds 100 million yen ($884,600) and the amounts they are paid. Businesses will now also have to declare how they evaluate performance and decide on the amounts they receive.

About 1,100 companies, or one-third of all listed companies, have performance-linked compensation for their executives, according to the FSA.

The new rules will require the disclosure of the ratio between fixed pay and the portion linked to performance for each executive role. Companies will also be required to reveal the performance indicators they use, such as operating income or net profit.

Of the companies listed on the markets operated by Japan Exchange Group, including the Tokyo Stock Exchange, 944 companies, or 26%, have an executive compensation committee that makes compensation decisions -- although the existence of a committee alone does not guarantee objective decision making.

Financial regulators have become increasingly concerned over opacity in the way Japanese companies make decisions on executive compensation. Nissan Motor, for example, does not have a compensation committee.

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