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Library - Codes and Rules - Japan

Japan

Contents

  1. Laws
  2. Accounting Standards
  3. Official Codes and Guidelines
  4. Private Codes and Guidelines

1. Laws

Companies Act 2005
In 2005, the Japanese Government adopted a new Companies Act. The Companies Act used to form part of the Commercial Code of 1899 and the adoption of the new Companies Act was not just a change of format, but also entailed significant changes to the substance of the old company law which was modernised in line with international standards. The new Act came into effect on May 1, 2006.

The new Act updated the regulation, making a change as to the types of companies that could be created; abolishing the minimum capital requirements; and reformed the internal structure of companies limited by shares as well as on their size and whether they were private or public listed companies.

Additionally, the Act allowed companies to extend the terms of office for directors and statutory auditors; relaxed the requirement for the general meeting to dismiss a director, changing it from the extraordinary resolution to an ordinary resolution; and allowed the board to pass a resolution in writing, provided that all the members of the board agreed on the proposal and the statutory auditor or a member of the audit committee, as the case maybe, did not object to it.

Financial Instruments and Exchange Law (September 2007)
The Financial Instruments and Exchange Law (FIEL), which replaces the Securities and Exchange Law, was approved in the ordinary Diet session in June 2006. It came into effect in September 2007. The Financial Futures Trading Law, the Law Concerning Foreign Securities Firms, the Law Concerning the Regulation of Investment Advisory Services Relating to Securities and the Law Concerning the Regulation of Mortgage Business have all been abolished and consolidated into FIEL. Eighty-nine laws in total were amended, some of which were consolidated into the new law. The new law has broadened the scope of instruments covered under the law, and claims to protect investors by enhancing disclosure by listed companies, through introduction of statutory quarterly reporting and enhancing internal control over financial reporting. While the law came into effect in September 2007, parts of it will only become operational in stages over the next year.

Commercial Code Revision on Boards (April 2003)
In 2002, Japan amended its company law, the Commercial Code, to introduce the “Company with Committees” system. This gave companies the choice of either continuing with a statutory auditor system or adopting a modern “US-style” governance structure with independent directors, three board committees (for audit, remuneration and nomination) and “executive officers” (a new Japanese term for corporate managers, who have duties distinct those of directors). The new rules came into effect on April 1, 2003. A concise presentation from the Ministry of Justice is available.

Commercial Code Revision on Statutory Auditors and Directors (May 2002)
In late 2001, Japan amended its company law, the Commercial Code, to strengthen the position and independence of statutory auditors, who have the job of supervising directors and ensuring they act lawfully and in the interests of the company. Confidence in this system has never been high, not least because auditors are traditionally appointed by directors. Paradoxically, the new rules, which came into effect on May 1, 2002, also reduced the liability of directors and statutory auditors in relation to shareholder lawsuits--a reaction to rising litigation over the 1990s. Here are some of the
highlights of the new rules as they relate to statutory auditors.

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2. Accounting Standards

Accounting Standards
The Financial Accounting Standards Foundation was established in 2001, within which the Accounting Standards Board of Japan (ASBJ) is responsible for developing accounting standards and the convergence of these with international accounting standards.

ASBJ continues to talk to the International Accounting Standards Board (IASB) to achieve convergence between Japanese Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRSs).

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3. Official Codes and Guidelines

Tokyo Stock Exchange Principles (March 2004)
In March 2004, the Listed Company Corporate Governance Committee, established by the Tokyo Stock Exchange in December 2002, published the "Principles of Corporate Governance for Listed Companies". The Committee began its consultations at the request of the late Masaaki Tsuchida, former President and CEO of the Tokyo Stock Exchange, who envisioned the Stock Exchange being more actively involved in enhancing corporate governance. The document states that the list set forth is not a requirement for listed companies to adopt, or a criterion of the best or minimum standard of model policies for corporate governance. What it purports to be is a tool that provides a “common base for recognition” of corporate governance, and a basis for listed companies to enhance governance by paying attention to the rights of shareholders; equitable treatment of shareholders; relationship with stakeholders in corporate governance; disclosure and transparency; and responsibilities of the Board of Directors, Auditors, Board of Corporate Auditors, and other relevant groups.

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4. Private Codes and Guidelines

JCGF Principles (Revised), 2001
In October 2001, the Japan Corporate Governance Forum (JCGF), a private-sector association comprising members from business, academia and journalism, published an updated version of its 1998 code (see story below). Titled simply "Revised Corporate Governance Principles”, this new code covers similar ground as before but outlines its principles in more detail. It adds a couple of new principles (eg, litigation committee, executive management committee), drops some earlier ones (eg, on the statutory auditor) and provides considerably more commentary. However, some principles are less clear-cut than before (eg, the role of board leader), perhaps intentionally so; while the distinction drawn between “outside director” and “independent director” is somewhat confusing. And unlike JCGF’s earlier reports, this one does not advocate quarterly reporting.

On the other hand, this document does raise the issue of fair disclosure and brings much greater clarity to board committees, internal audit and investor relations, among other things. In a cultural aside, it also notes how changing attitudes in Japan are influencing CEO pay. Whereas once CEOs, like the fabled samurai, put “honor and pride above all else” (meaning: status within a company compensated for low remuneration), today “samurai flourish only in Kurosawa films”!

JCGF Principles (Final Report), 1998
In May 1998, the Japan Corporate Governance Forum (JCGF) followed up its Interim Report (see story below) with its “Corporate Governance Principles—A Japanese View (Final Report)”. This document, which took into account comments from domestic and overseas organisations, contains the same basic principles as the previous report, but expands upon them, provides more specificity and offers additional commentary.

Like its earlier iteration, this report is particularly interesting when discussing the flaws in the conventional system of Japanese governance. In essence, it wants to give back to the board of directors the powers it should have had all along: “It is questionable whether the Japanese board of directors actually complies with the Commercial Code’s stipulation that it functions as the body which decides on corporate will and exercises corporate oversight…It is in order to rejuvenate and strengthen the board of directors that these proposals have been made.” This is an excerpt from the report.

JCGF Principles (Interim Report), 1997
In October 1997, the Japan Corporate Governance Forum (JCGF), a private-sector association comprising businessmen and academics, published Japan’s first corporate governance code. Titled, Corporate Governance Principles—A Japanese View (Interim Report)”, the document offers 17 ideas for modernising the governance of Japanese corporations so that they become more competitive in the global market. A primary objective of these principles is to rejuvenate the board-of-director structure within the Japanese corporation and firmly establish it as the guardian of corporate governance.

This report is significant because while it seeks to blend global best practices with Japanese business traditions (“the company as a community”), it does not pull any punches with regard to the flawed nature of the conventional Japanese governance model (that is, the dual structure of a weak board of directors and an weaker board of statutory auditors). Yet while quite radical in content and aspiration (“independent, non-executive directors should comprise a majority on the board”), it is also pragmatic in approach. It suggests, for example, that audit committees be formed within boards over the medium term, but recommends that the statutory auditor system be improved over the short term. JCGF began working on this code in December 1996--before the Asian crisis.

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15-Jun-2011
   
 
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