Japan FSA Proposes Significant Enhancements to Corporate Governance Disclosure

The Japanese Financial Services Agency has proposed enhanced corporate governance disclosure in a company’s securities report. Listed companies in Japan are currently required to disclose basic information of their corporate governance systems in their securities reports. Given the increasing importance of sound corporate governance to the investment community, the FSA would require additional disclosure, mainly centered on executive compensation.

As a threshold matter, companies would have to outline their governance system and the reason for selecting a particular system. They would also have to disclose the state of coordination between outside directors and the corporate departments in charge of internal control and internal auditing, as well as describe the functions and roles of the outside directors in the governance of the company.

The long-term soundness of a company’s executive compensation scheme has become a critical component of corporate governance. Information on compensation in all its forms is important for shareholders and investors, said the FSA, since it allows them to examine whether incentive structures for the management of the company and remuneration amounts are appropriate. Thus, the FSA would require the disclosure of detailed information regarding the remuneration for directors in the company’s securities report.

Specifically, for each director or statutory auditor whose remuneration for the relevant fiscal year is JPY 100 million or more, the company would have to disclose the total amount of remuneration, the name of the executive, and a breakdown by the type of payments, such as salary, bonus, stock option, and retirement payment. The company must also explain its remuneration policies for its directors and statutory auditors, and the way they are decided.

Finally, regarding the results of resolutions at shareholders’ meetings, the current rule requires listed companies to disclose whether each resolution was accepted or rejected, but not the number of votes for support or objection. The FSA believes that requiring the disclosure of votes cast for or against a resolution will give a clearer picture of the decisions made by shareholders, which, in turn, will entail a better functioning of market pressure over management. Therefore, the FSA would require disclosure without delay after the shareholders meeting of the number of votes cast for, against or withheld, including a separate tabulation with respect to each nominee for director or statutory auditor.

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