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Politics

Japan's corporate code to urge companies to explain CEO hiring

New rules are intended to foster greater openness and foreign investment

Investors and bloggers attend a meeting at the Financial Services Agency in Tokyo in June 2017. Revisions to Japan's corporate governance code aim to foster greater transparency.   © Reuters

TOKYO -- The Japanese government will revise the country's corporate governance code to improve management transparency and encourage global investors to invest in Japanese companies.

The Financial Services Agency's council on corporate governance on Thursday released proposed guidelines for dialogue between investors and companies. The new code will call for greater transparency in the appointment and dismissal of CEOs.

The changes will be reflected in the new governance rules to be published by the FSA later this year. Companies are not required to adhere to the code, but must explain why if they choose not to.

The current code calls for company boards to objectively assess the process of selecting the chief executive, and says this assessment should be reflected in how the CEO is chosen.

The new code is more specific, requiring listed companies to state whether they use independent committees in selecting a CEO, and whether they have objective and timely procedures for dismissing an underperforming corporate head.

The new code will also require companies to respond to questions from investors, such as whether the number of outside directors, or their advice, is appropriate. Companies will have to raise the ratio of outside directors from the current minimum of two to one-third of all board members. Regulators believe the new rules will make management more transparent, but critics point out that finding qualified people to fill independent director slots will be a challenge.

The new governance code will also encourage businesses to unwind cross-shareholdings, which make it difficult for outside shareholders to exercise their voting rights. It will set up a system to determine whether companies' equity stakes in others are appropriate.

Under the new code companies will have to disclose whether they have invested in new businesses, or have withdrawn or sold existing businesses, and why they have done so.

The government announced that it will review the corporate governance code, as necessary, in an economic policy package compiled late last year. The FSA and the Tokyo Stock Exchange published Japan's first corporate governance code in 2015. The review is aimed at enhancing the international competitiveness of Japanese companies.

Last year, the FSA revised the Japanese version of the stewardship code -- a code of conduct for institutional investors. The code adopted a rule requiring companies to disclose how they exercise their voting rights at companies in which they invest.

The aim of the revisions is to make the activities of both companies and investors more transparent, contributing to sustainable economic growth.

 

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