Haruyuki Yamashita is the Head of Policy Engagement at the Tokyo Stock Exchange New York Office.
Introduction
The Tokyo Stock Exchange (TSE) has advanced governance reforms through Japan’s Corporate Governance Code and related initiatives, with the aim of supporting sustainable growth and enhancing corporate value over the mid- to long-term. In April 2022, TSE restructured its market segments to provide an attractive cash equity market that underpins the sustainable growth and corporate value creation of listed companies, while gaining strong support from a diverse base of domestic and international investors.
Among the new market segments, the Prime Market has been positioned as one “centered on constructive dialogue with global investors.” Correspondingly, the revised Corporate Governance Code introduced specific requirements applicable only to Prime Market companies, most notably the raising of the minimum threshold for independent outside directors to one-third of the board and the strengthening of English disclosures which has been a longstanding request, particularly from overseas investors. These measures go beyond the traditional “defensive” role of governance, such as preventing corporate scandals, and place equal emphasis on “proactive” governance, which enhances companies’ capacity to generate earnings. The latter has gained particular importance as Japan seeks to shift from a deflationary, cost reduction-oriented economy toward a growth economy driven by wage increases and investment, where companies are expected to take appropriate risk in pursuit of sustainable growth and corporate value enhancement.
Against this backdrop, in March 2023 TSE launched a new initiative requesting that listed companies implement “management that is conscious of the cost of capital and stock price” (hereafter, the “TSE Initiative”). The TSE Initiative seeks to encourage management to strengthen capital efficiency and pursue strategies that enhance mid- to long-term corporate value by improving profitability, raising valuation metrics, and earning investor confidence. The TSE Initiative has attracted significant attention both domestically and abroad, serving as a reference point for other exchanges in Asia.
This article will revisit the rationale behind the TSE Initiative, review its progress to date, and provide an assessment of its current status.
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