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Japan's revised governance code takes on cross-shareholdings

Tokyo bourse wants to see more diversity in the boardroom

Japan's revised corporate governance code focuses heavily on cutting back cross-shareholdings and improving transparency.

TOKYO -- The Tokyo Stock Exchange is urging Japanese companies to bring their practices more in line with global norms by reducing cross-shareholdings and tapping more women and international talent for directors under a revised corporate governance code released Friday.

This marks the code's first update since the Financial Services Agency and the TSE introduced the original version in 2015. While the code itself is not legally binding, companies are being asked to report on progress by December. Those not in compliance will have to explain why. 

The previous document asked companies to disclose their cross-shareholding policy, but the new version goes a step further by urging companies to disclose plans for reducing such arrangements with banks and business partners. They are asked to annually evaluate whether each cross-shareholding is still appropriate based on its benefits and risks.

While the TSE has pushed the corporate sector to cut down on cross-shareholdings for some time, companies have been reluctant, citing the possible adverse impact on business relations. The new code tries to alleviate their concerns by telling companies not to "hinder the sale of the cross-held shares by, for instance, implying a possible reduction of business transactions."

Excessive cross-shareholdings could bring a sense of complacency to management and sap capital efficiency. "The more cross-shareholdings a business has, the lower its return on return on equity, which indicates how efficiently it's run," said Toshi Oguchi, representative director of Governance for Owners Japan.

Some companies have made progress. Yamaha sold a portion of its stake in Yamaha Motor last year. Shiseido and Nippon Gas are each working to cut back cross-shareholdings with financial institutions.

Cross-shareholdings accounted for more than 30% of the total market capitalization in Japan in the 1990s, according to the Nomura Institute of Capital Markets Research. The figure hit a record low of about 10% as of the end of March, but the TSE believes that this is still too high.

The revised code also has recommendations for reforming corporate leadership. It calls for transparent and fair procedures on the appointment and dismissal of senior management, including CEOs. 

Companies are told to be aggressive in inviting outside directors. Companies should go beyond the recommended two and appoint "a sufficient number" of independent directors if deemed necessary, the revised document says. In its push for diversity, the new code explicitly encourages companies to take into consideration such factors as "gender and international experience" -- a reference to naming more women and non-Japanese to serve.

On business strategies and plans, companies are asked to provide "clear and logical" explanations to shareholders on the allocation of management resources by "reviewing their business portfolio and investments in fixed assets, R&D, and human resources."

The FSA released a draft of the revisions in March, and the TSE had been taking feedback since late that month.

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