Corporate Governance Code Documentation for TSE-Listed Companies in Japan
Japan's Corporate Governance Code operates on comply-or-explain with increasing expectations for Prime Market listings. Here's what documentation is required and how to review for CGC compliance.
Japan's corporate governance transformation is one of the most significant in the developed world. The Corporate Governance Code (CGC), first introduced in 2015 and revised in 2021, has fundamentally changed how Japanese listed companies approach board composition, shareholder engagement, and disclosure. The 2022 TSE market restructuring — creating Prime, Standard, and Growth markets — added differentiated governance expectations, with Prime Market companies facing the highest standards.
The CGC operates on a "comply or explain" basis, but the quality of explanation matters enormously. Boilerplate explanations such as "we plan to comply in the future" are no longer accepted by investors, proxy advisers, or the TSE. Companies must either comply with each principle or provide a substantive, company-specific explanation for non-compliance that demonstrates thoughtful governance.
CGC Structure and Application
Market-Specific Application
| Market | CGC Application |
|---|---|
| Prime | All principles (General Principles, Principles, and Supplementary Principles) apply |
| Standard | General Principles and Principles apply; Supplementary Principles on comply-or-explain |
| Growth | General Principles apply; Principles and Supplementary Principles on comply-or-explain |
Five General Principles
| General Principle | Focus | Key Documentation |
|---|---|---|
| 1 | Securing the rights and equal treatment of shareholders | Shareholder engagement policy, cross-shareholding policy |
| 2 | Appropriate cooperation with stakeholders | Sustainability policy, diversity policy, whistleblowing system |
| 3 | Ensuring appropriate information disclosure and transparency | Disclosure policy, English disclosure, non-financial information |
| 4 | Responsibilities of the board | Board charter, committee charters, evaluation, succession planning |
| 5 | Dialogue with shareholders | Shareholder engagement framework, IR policy |
Required Governance Documentation
1. Corporate Governance Report (CGR)
Filed with the TSE, the CGR is the primary governance disclosure document:
| Section | Required Content |
|---|---|
| Basic views on corporate governance | Company's governance philosophy and approach |
| Capital structure and policies | Foreign shareholding ratio, major shareholders, cross-shareholdings |
| Corporate attributes | Listed market, fiscal year, industry, employees, revenue |
| Governance structure | Board composition, committee structure, statutory auditor or audit committee system |
| CGC compliance | For each principle: comply status or explanation for non-compliance |
| Other governance matters | Anti-takeover measures, related-party transactions, executive compensation |
CGR quality: The TSE and institutional investors increasingly scrutinise the quality of CGR explanations. Generic, boilerplate explanations attract negative attention from proxy advisers and may trigger TSE engagement.
2. Board Composition and Independence Documentation
| Document | CGC Requirement |
|---|---|
| Independent director criteria | Documented independence standards (CGC requires at least one-third independent for Prime; majority recommended) |
| Independence assessment | Per-director assessment against independence criteria |
| Skills matrix | Board skills matrix disclosing each director's expertise areas |
| Diversity policy | Gender, nationality, career background diversity targets |
| Board composition rationale | How the current composition serves the company's strategy |
Prime Market expectation: At least one-third independent directors (majority is the aspiration). Skills matrix disclosure. Diversity including gender and internationality.
3. Board Effectiveness Evaluation
CGC Supplementary Principle 4.11.3 requires annual board effectiveness evaluation:
| Element | Documentation Required |
|---|---|
| Evaluation methodology | Self-assessment, peer assessment, or third-party evaluation |
| Evaluation criteria | Board composition, operation, discussion quality, committee effectiveness |
| Results summary | Key findings from the evaluation |
| Action items | Improvements identified and planned actions |
| Progress reporting | Progress on previous year's action items |
| Disclosure | Summary of evaluation process and results in the CGR |
4. Nomination and Remuneration Committee Documentation
CGC Principle 4.10.1 recommends (effectively requires for Prime Market) independent advisory committees:
| Document | Requirement |
|---|---|
| Committee charter | Mandate, composition, authority, meeting procedures |
| Nomination criteria | Criteria for selecting and nominating directors and officers |
| Remuneration policy | Compensation philosophy, structure, performance linkage |
| Succession planning | CEO and key management succession documentation |
| Committee reports | Reports to the board on committee deliberations and recommendations |
| Independence | Committee composed of a majority of independent directors |
5. Cross-Shareholding Documentation
A uniquely Japanese governance issue — CGC Principle 1.4 requires:
| Document | Requirement |
|---|---|
| Cross-shareholding policy | Board-approved policy on cross-shareholdings |
| Annual review | Annual board-level review of each cross-shareholding |
| Economic rationale | For each holding: documented economic rationale (risk-return analysis) |
| Reduction plan | If reducing: timeline and approach |
| Voting rights exercise | Policy on how voting rights of cross-held shares are exercised |
| Disclosure | Number and value of cross-shareholdings in annual securities report |
6. Sustainability and ESG Documentation
The 2021 CGC revision significantly strengthened sustainability expectations:
| Document | CGC Requirement |
|---|---|
| Sustainability policy | Board-level commitment to sustainability |
| Climate disclosure | TCFD-aligned disclosure for Prime Market companies (CGC Supplementary Principle 3.1.3) |
| Human capital disclosure | Investment in human capital, including diversity metrics |
| Intellectual property disclosure | Investment in intellectual property and innovation |
| Sustainability committee | Governance structure for sustainability oversight |
| Materiality assessment | Identification of material sustainability issues |
Prime Market requirement: TCFD-equivalent climate disclosure, including governance, strategy, risk management, and metrics/targets.
7. Shareholder Engagement Documentation
| Document | Requirement |
|---|---|
| Engagement policy | Framework for constructive dialogue with shareholders |
| Senior management involvement | Documentation of CEO/CFO participation in engagement |
| Feedback integration | How shareholder feedback is communicated to the board |
| Engagement records | Records of significant shareholder meetings and key topics |
| AGM practices | Measures to facilitate shareholder participation (scheduling, electronic voting, English materials) |
8. English Disclosure (Prime Market)
CGC Supplementary Principle 3.1.2 requires Prime Market companies to disclose in English:
| Document | English Disclosure |
|---|---|
| Corporate Governance Report | Required |
| Annual securities report | Strongly recommended |
| Earnings presentations | Required |
| Sustainability report | Strongly recommended |
| Notice of AGM | Required |
| Business strategy | Recommended |
Common Governance Documentation Gaps
Gap 1: Board Effectiveness Evaluation Without Substance
Evaluations that are box-ticking exercises — generic questionnaires with positive results and no meaningful action items. Institutional investors expect substantive evaluations with specific findings and concrete improvement actions.
Gap 2: Cross-Shareholding Review Without Economic Rationale
Board reviews of cross-shareholdings that confirm retention without documented economic analysis. Investors and proxy advisers increasingly expect rigorous cost-benefit assessment for each holding.
Gap 3: CGR Explanations That Are Boilerplate
"We will consider compliance in the future" or "our current approach achieves the same objective" without specifics. The TSE and institutional investors expect company-specific explanations with concrete timelines.
Gap 4: Sustainability Disclosure Without TCFD Alignment
Prime Market companies providing qualitative sustainability statements without structured TCFD-aligned climate disclosure covering all four pillars (governance, strategy, risk management, metrics/targets).
Gap 5: Skills Matrix Without Strategic Linkage
Board skills matrices that list generic skills without connecting them to the company's specific strategy and the governance challenges it faces. The skills matrix should demonstrate that board composition is intentional and strategy-aligned.
Reviewing CGC Documentation
Corporate Governance Report Review
| Criterion | Weight | What to Check |
|---|---|---|
| Principle coverage | 3 | All applicable principles addressed (comply or explain) |
| Explanation quality | 3 | Non-compliance explanations are company-specific, substantive, and include timelines |
| Board effectiveness | 2 | Evaluation disclosed with methodology, findings, and action items |
| Cross-shareholding rigour | 2 | Each holding reviewed with documented economic rationale |
| English quality | 2 | English disclosure accurate, complete, and professionally translated |
Sustainability Documentation Review
| Criterion | Weight | What to Check |
|---|---|---|
| TCFD alignment | 3 | All four TCFD pillars addressed (Prime Market) |
| Human capital disclosure | 2 | Diversity metrics, training investment, employee engagement data |
| Quantitative data | 2 | Specific metrics with targets and year-on-year comparison |
| Materiality assessment | 2 | Documented process for identifying material sustainability issues |
| Board oversight | 1 | Governance structure for sustainability documented |
Frequently Asked Questions
What happens if we don't comply with CGC principles?
The CGC is not legally binding — non-compliance doesn't result in penalties. However, the "comply or explain" mechanism creates market discipline. Proxy advisers (ISS, Glass Lewis) may recommend against directors at companies with poor governance disclosure. Institutional investors may vote against management proposals. The TSE may engage with companies whose CGR quality is inadequate.
How has the Prime/Standard/Growth restructuring affected governance expectations?
Prime Market companies face the highest governance expectations: all CGC principles apply, one-third independent directors minimum (majority aspiration), TCFD-aligned climate disclosure, English disclosure, and enhanced board effectiveness evaluation. Companies that moved to Prime accepted these higher standards.
Do we need a majority of independent directors?
The CGC states that Prime Market companies "should appoint at least one-third of their directors as independent directors" and "should consider" appointing a majority. Currently, one-third is the effective minimum for Prime Market; a majority is aspirational but increasingly common among large companies. Institutional investors typically expect at least one-third.
How important is the skills matrix?
Increasingly important. Institutional investors and proxy advisers use the skills matrix to assess whether board composition is intentional and strategy-aligned. A well-constructed skills matrix demonstrates that the board has the expertise needed for the company's challenges. Generic or superficial matrices are viewed negatively.
Can AI review help with CGC documentation?
AI review can check Corporate Governance Reports for principle coverage, assess explanation quality (generic vs company-specific), verify sustainability disclosure against TCFD structure, check skills matrix for strategic linkage, and assess English translation quality. Assessment of governance effectiveness and strategic alignment requires qualified governance professionals.
Key Takeaways
- Japan's CGC has transformed corporate governance — comply-or-explain requires substantive engagement, not box-ticking.
- Prime Market companies face the highest standards — all principles, TCFD climate disclosure, English disclosure, and enhanced board evaluation.
- CGR explanation quality is critical — boilerplate non-compliance explanations attract negative attention from investors and proxy advisers.
- Cross-shareholding review must include economic rationale — institutional investors increasingly challenge holdings without documented justification.
- Board effectiveness evaluation must be substantive — with specific findings, action items, and progress reporting.
- English disclosure is mandatory for Prime Market — quality of translation matters for international investor engagement.
- AI review checks principle coverage, explanation quality, and disclosure structure — governance effectiveness requires qualified professionals.
This article is for informational purposes only. The Corporate Governance Code, TSE listing rules, and related guidelines are subject to revision. Consult a qualified governance professional, company secretary, or legal adviser for guidance specific to your listed company and market segment.