Corporate governance reforms for Japanese listed companies have been accelerating in recent years. However, a tide of shareholder activism is hitting corporate Japan even harder in the era of the Covid-19 pandemic, demanding more effective governance, sustainable growth, attention to environmental and social issues, as well as decent shareholder returns. The reforms are ongoing – Japanese listed companies are still in the process of transforming their governance systems into something that has never existed before in the Japanese market. In this article, we will discuss two of the most recent governance-related topics in Japan – the restructuring of the market segments of the Tokyo Stock Exchange (TSE) which will take effect in April 2022, and the revised Corporate Governance Code which took effect in June 2021.
In order to cultivate an attractive market that enjoys a high level of support from a wide variety of investors, both domestic and foreign, the TSE plans to revise its market segmentation. Thus far, the TSE’s market segments were comprised of the First Section, Second Section, Mothers and JASDAQ. As of 4 April 2022, those segments will be restructured into, and replaced with, three new segments: Prime Market, Standard Market and Growth Market.
The Prime Market is a market for companies with a market capitalisation (liquidity) that is large enough to attract a wide-range of institutional investors, with a sophisticated corporate governance structure and a strong focus on constructive engagement with investors. Companies wishing to list their shares on the Prime Market must satisfy the highest requirements of all the segments in terms of liquidity, governance and financial performance.
The standards for initial listings on the Prime Market include the following criteria:
- Number of shareholders: at least 800 shareholders.
- Number of tradable shares: at least 20,000 units.
- Tradable share market cap: at least JPY10bn.
- Trading value (market cap): at least JPY25bn.
- Financial performance: total profit of at least JPY2.5bn for the last two years.
- Financial status (shareholder equity): At least JPY5bn.
The Prime Market exposes companies to the highest level of ‘public market control’ by requiring a tradable share ratio of 35% – as a result of this, certain management-friendly shareholders (also known as ‘stable shareholders’ in Japan) as defined under the TSE regulations are allowed to hold only less than two thirds of the total votes of the company (ie, the voting threshold required to pass a special resolution at a shareholders’ meeting of the company under the Companies Act).
The Standard Market is a market for companies that have a certain size of capitalisation (liquidity) to qualify as investment targets in open markets, with a basic corporate governance structure as a listed company.
The standards for initial listings on the Standard Market include the following criteria:
- Number of shareholders: at least 400 shareholders.
- Number of tradable shares: at least 2,000 units.
- Tradable share market cap: at least JPY1bn.
- Trading value (market cap): no requirement.
- Financial performance: Total profit of at least JPY100m for the last year.
- Financial status (shareholder equity): positive net asset.
A tradable share ratio of 25% is required for companies listed on the Standard Market.
The concept of the Growth Market is a market intended for companies with high growth potential but higher risks in terms of financial performance. The Growth Market is designed to enable investors to make reasonable investment decisions based on disclosed information, such as business plans of the company and its progress.
The standards for initial listings on the Growth Market include the following criteria:
- Number of shareholders: at least 150 shareholders.
- Number of tradable shares: at least 1,000 units.
- Tradable share market cap: at least JPY500m.
- Trading value (market cap): no requirement.
- Financial performance: no requirement.
- Financial status (shareholder equity): no requirement.
A tradable share ratio of 25% is also required for companies listed on the
Revised Corporate Governance Code
The TSE published the revised Corporate Governance Code (the Code) with effect from 11 June 2021. Among other various revisions and amendments, the revised Code has three key focuses: (1) enhanced roles of independent outside directors; (2) ensuring diversity in the core human resources; and (3) addressing sustainability issues. As discussed above, after the market restructuring that will take effect soon, the Prime Market is expected to become the flagship stock market in Japan attracting investors globally. As such, some of the new requirements under the revised Code are only applicable to Prime-listed companies, while others are also applicable to companies listed on the Standard and/or Growth Markets.
Enhanced roles of independent outside directors
The revised Code requires Prime-listed companies to have a number of independent outside directors equalling to one third or more of the total number of directors. Further, the Code provides that a person with management experience at other companies should be appointed as one of the independent outside directors. The revised Code also encourages Prime-listed companies to establish a nomination committee/compensation committee with a majority of the committee members being independent outside directors.
Ensuring diversity in corporate core human resources
All listed companies are encouraged under the revised Code to set voluntary and measurable goals to ensure diversity in human resource management (eg, promotion of women, foreigners and mid-career hires). In addition, the revised Code provides that companies should publicly disclose human resource development policies and internal environmental development policies in order to ensure diversity, together with the implementation status of such policies.
Addressing sustainability issues
Under the revised Code, companies are encouraged to develop a basic policy on sustainability, and publicly disclose
relevant initiatives. Further, the Code provides that Prime-listed companies
should enhance the quality and quantity of their climate change related disclosures under the TCFD or other equivalent international frameworks.