Stock companies encounter agency problems that arise when the interests of shareholders and the management differ. Corporate governance is the enforced discipline on the management designed and devised to alleviate the agency problems, and a structure to seek the alignment of interests of shareholders and the management.
The global financial crisis – the so-called Lehman Shock in Japan – has revealed the weakness in corporate governance in the financial industry. Reflecting on this experience, the United Kingdom abolished the Combined Code, which had been the U.K.’s corporate governance code since 1999, and replaced it with the newly developed Corporate Governance Code and the Stewardship Code in 2010. The stewardship responsibilities by institutional shareholders (prescribed in Stewardship Code) have been added to the existing monitoring by the independent board of directors (prescribed in Corporate Governance Code) to strengthen governance.
Three years later, the Stewardship Code was formulated relatively in an abrupt manner in Japan as the Japan Revitalization Strategy, i.e., 3rd arrow of Abenomics. It was the start of corporate governance reform. The following year, the Corporate Governance Code was also formulated as a revised Japan Revitalization Strategy 2014, following the Stewardship Code's formulation. Both Codes stipulate their purposes as proactive governance aiming for sustainable corporate growth (increase in corporate value over the mid to long-term.) The rapid-fire formulations of the Codes without runups surprised foreign institutional investors who had been concerned about the Japanese corporations’ governance. The Corporate Governance Code's requirement for appointment of independent directors especially garnered attention and praise as a turnaround of Japan's stance, which had been considered negative for outside directors. The Code is the set of rules to “Comply or Explain” and not legally binding. Nevertheless, Japanese companies have been proactively appointing independent directors, and 93% of the listed companies on the First Section of the Tokyo Stock Exchange (TSE) have appointed two or more independent directors in 2019, according to TSE. In this report, we examine if the governance of Japanese corporations has shifted drastically.
To capture the shift in corporate governance in Japanese corporations, Nikko Research Center, Inc. developed the governance evaluation model (Governance Research Scores: GR Scores) using benchmarking based on the Corporate Governance Code. While laws and legislations indicate the bars to which the companies at least comply, the Corporate Governance Code shows how they should be i.e., the best practices. Therefore, using the Code as a benchmark, the GR Scores measure each company’s distance from the benchmark and score it. As such, the shorter the distance, the stronger the governance. In addition to Japan's Corporate Governance Code (domestic standard), the GR Scores also measure the distance from the global base using the ICGN Global Governance Principles as the global standard. We have started benchmarking on the top 100 companies by market cap in 2017 and published the annual results in Nikko Research Review ever since . In 2020, the fourth year, we report the detailed governance status of the 111 companies, which are subject to evaluation by the GR Scores in addition to the results of the GR Scores 2020.