Introducing Sustainability into Japanese Corporate Governance

The Shift to “New Capitalism” or a Continued Gradual Transformation?

Abstract

Japan’s corporate governance practice is making rapid developments in its engagement with sustainability. Japan already has the largest number of companies in the world which have committed to the Climate-related Financial Disclosures (TCFD) framework. The Financial Instruments and Exchanges Act will be amended in the near future to introduce mandatory disclosure of sustainability- related information. The Tokyo Stock Exchange is also pushing developments through its demand that companies listed in its Prime Section implement the TCFD framework fully. The Code of Conduct for Environmental Social Governance (ESG) ratings and data providers will also be introduced soon. All these developments may appear to suggest that the focus of corporate governance in Japan has made a quick turn from shareholder primacy to sustainability. However, the approach to the sustainability agenda in fact retains a Japanese colour in terms of both the regulation and practice of corporate governance. The reform is driven by the pressure from the capital market and the initiatives of institutional investors. There is a continuity from the previous reforms urging Japanese managers to turn to the shareholders in that both the previous and current reforms are responses to demands from the capital market. The political power behind the reform is also common, i.e. the ruling centre- right coalition, convinced of the need for corporate governance reform appealing to institutional investors as drivers of economic growth. As regards the style of regulation, regulators prefer to employ a coordinated approach to the industry rather than to introduce totally new regulation. Finally even those companies that are advanced in adapting to sustainability seldom employ monitoring mechanisms while making significant efforts for implementation of their strategy for sustainability. In this respect, features of Japanese corporate governance have been retained. After all, corporate governance in Japan changes only gradually, taking a longer time as compared with developments occurring on the surface.