“Stewardship responsibilities” and the role of the Code

In this Code, stewardship responsibilities refer to the obligations of institutional investors to enhance medium- to long-term investment returns for their clients and beneficiaries. This is achieved by improving and fostering the corporate value and sustainable growth of investee companies through constructive engagement, or purposeful dialogue. Such engagement should be based on in-depth knowledge of the companies, their business environment, and a consideration of sustainability factors, including environmental, social, and governance (ESG) factors, consistent with investment management strategies.

Aims of the Code

The Code aims to promote the sustainable growth of companies and the economy as a whole. It establishes that the board of directors at an investee company holds the responsibility for enhancing corporate value through governance and oversight. The roles of the board and institutional investors are viewed as complementary and essential for high-quality corporate governance. The Code identifies two categories of institutional investors: asset managers, who are entrusted to manage funds, and asset owners, such as pension funds, who provide the funds. Asset managers are expected to contribute through day-to-day dialogue, while asset owners are expected to disclose policies and monitor their managers without placing undue emphasis on short-term performance.

The Code primarily targets investors in Japanese listed shares but may apply to other asset classes. It also recognises the role of service providers, such as proxy advisors and investment consultants, in enhancing the investment chain. Investors and beneficiaries should acknowledge that costs associated with stewardship activities are an indispensable element of asset management.

“Principles-based approach” and “Comply or explain”

The Code adopts a principles-based approach rather than a rule-based one to provide flexibility suited to the specific conditions of each investor, such as their size and investment policies. It is not a legally binding regulation. Instead, the Financial Services Agency expects investors who support the Code to publicly disclose their intention to accept it. The Code operates on a “comply or explain” basis, meaning that if an investor finds certain principles unsuitable, they can choose not to comply by providing a sufficient explanation of their chosen approach. Investors are expected to annually review and update their disclosures on their websites and notify the Financial Services Agency of their URL for inclusion in a public list.

Principle 1

Institutional investors should have a clear, publicly disclosed policy on how they fulfil their stewardship responsibilities. This policy should cover their role in the investment chain and specify how sustainability issues are integrated into their strategies. Asset owners should encourage managers to engage in effective stewardship and clearly specify principles when issuing mandates. Large asset owners, in particular, should proactively consider these issues rather than mechanically accepting a manager’s policy. Monitoring should focus on the quality of engagement rather than just the number of meetings or voting ratios.

Principle 2

Investors must have a clear policy for managing conflicts of interest and disclose it publicly. The interests of clients and beneficiaries must always come first. Asset managers should establish governance structures, such as independent boards of directors or third-party committees, to oversee decision-making and voting to prevent conflicts from influencing dialogue or the exercise of voting rights.

Principle 3

Investors should monitor investee companies continuously to fulfil their stewardship responsibilities. Monitoring should include financial and non-financial factors such as governance, strategy, performance, capital structure, and business risks, including those arising from social and environmental matters. Investors must use their judgement to identify issues that could result in material loss at an early stage.

Principle 4

Investors should seek a common understanding with investee companies and solve problems through constructive engagement. This includes explaining shareholdings to companies upon request and engaging in dialogue consistent with sustainability goals. Passive managers are specifically encouraged to take charge of engagement and voting from a long-term perspective. The Code also notes that collaborative engagement with other investors is an important option, provided it leads to sustainable growth. Investors must remain discreet regarding undisclosed material facts to comply with insider trading regulations.

Principle 5

Investors should have a clear voting policy and disclose their voting activity. Voting should not be a mechanical checklist but a tool to contribute to sustainable growth. The Code expects the disclosure of voting records for each investee company on an individual agenda item basis. Investors should also provide rationales for “for” or “against” votes on important items, especially where conflicts of interest exist. If using proxy advisors, investors must not mechanically depend on their recommendations but exercise their own judgement.

Principle 6

Investors should report periodically to their clients and beneficiaries on how they have fulfilled their stewardship and voting responsibilities. Asset owners should report at least once a year. Reports should be effective and efficient, though disclosure of confidential information is not expected.

Principle 7

To engage effectively, investors must develop necessary skills and internal resources. Management should have appropriate capability and experience, and be constituted independently from affiliated financial groups. Asset managers are encouraged to conduct regular self-evaluations of their stewardship activities and disclose the results.

Principle 8

Service providers, such as proxy advisors, should contribute to the investment chain by providing appropriate services. They must identify and manage conflicts of interest, maintain sufficient human resources in Japan, and ensure the accuracy of information used for voting recommendations by exchanging views with companies where necessary.

Background

The Code originated from the Japan Revitalization Strategy established in 2013 to revitalise the Japanese economy. Following instructions from the Prime Minister, the Financial Services Agency established a Council of Experts which developed the original Code in February 2014. Subsequent revisions occurred in May 2017 and March 2020 to enhance corporate governance reform. The third revision was completed in June 2025 following the “Action Program for Corporate Governance Reform 2024.”