Governance Briefing — April 4, 2022
The Tokyo Stock Exchange’s April 4, 2022 market restructuring into Prime, Standard, and Growth segments raises governance and disclosure expectations, requiring listed companies to strengthen investor relations, capital strategy, and sustainability reporting.
Executive briefing: On April 4, 2022 the Tokyo Stock Exchange (TSE) completed its market restructuring, replacing the previous First, Second, Mothers, and JASDAQ sections with three segments: Prime, Standard, and Growth. The overhaul aims to improve market transparency, corporate governance, and capital efficiency while aligning with global investors’ expectations. Companies listing on the Prime Market face heightened requirements for tradable share ratios, corporate governance code (CGC) compliance, and English-language disclosure. Boards and management teams must revisit investor relations strategies, sustainability reporting, and capital allocation plans to maintain segment eligibility and attract investment.
Segment overview and eligibility
The Prime Market targets companies with advanced governance and global investor appeal. Eligibility criteria include a tradable share ratio of at least 35%, market capitalization of tradable shares of ¥10 billion or more, and compliance with the revised Corporate Governance Code emphasizing independent directors and sustainability disclosures. The Standard Market requires a 25% tradable share ratio and ¥1 billion in tradable market cap, while the Growth Market caters to high-growth firms with flexible profitability requirements but rigorous disclosure on business plans.
Companies underwent a transitional period where they evaluated eligibility, submitted plans to meet criteria, or opted for different segments. Ongoing compliance will be monitored through annual filings, governance reports, and disclosure practices. Failure to meet continued listing requirements triggers improvement plans and potential delisting.
Operational priorities for listed companies
Finance and investor relations teams should assess capital structure and free float. Companies in the Prime Market must maintain adequate liquidity by increasing tradable shares—actions may include unwinding cross-shareholdings, conducting secondary offerings, or implementing share buyback policies aligned with investor expectations. Track ownership concentration metrics and communicate strategies to improve float with shareholders.
Upgrade disclosure practices. Prime and Standard Market companies must publish annual securities reports, corporate governance reports, and English-language materials—including notices of general meetings and financial statements. Implement translation workflows, quality assurance, and timelines to ensure simultaneous Japanese and English releases. Leverage digital investor relations platforms to disseminate materials globally and monitor investor feedback.
Enhance corporate governance code compliance. The 2021 CGC revision introduces expectations for appointing at least one-third independent directors (a majority for Prime companies), improving board diversity, and overseeing sustainability initiatives. Boards should perform skills matrix assessments, succession planning, and director training on climate and digital governance. Establish board committees for nomination, remuneration, and audit with clear charters. Document evaluations of board effectiveness and disclose improvement actions.
Focus on capital efficiency metrics such as return on equity (ROE) and price-to-book ratio (PBR). The TSE and Japan Exchange Group (JPX) have signaled that companies trading below book value should articulate strategies to enhance valuations. Build integrated reporting that links strategy, capital allocation, and sustainability initiatives to financial outcomes. Engage proactively with institutional investors, including those adhering to Japan’s Stewardship Code, to discuss long-term value creation.
Sustainability and ESG reporting expectations
The CGC revision calls for enhanced sustainability disclosures, referencing frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD) and SASB. Prime Market companies must disclose sustainability initiatives and climate-related financial impacts in securities reports. Establish cross-functional ESG steering committees to collect data, set targets, and publish integrated or sustainability reports. Align metrics with TCFD pillars (governance, strategy, risk management, metrics & targets) and consider adopting science-based emissions targets.
Supply chain and human capital disclosures are gaining attention. Companies should map material ESG topics—diversity, human rights, occupational health and safety, and innovation—and integrate them into risk management frameworks. Implement data collection systems for greenhouse gas emissions, workforce diversity, and supply chain due diligence. Coordinate with procurement to ensure supplier codes of conduct align with ESG objectives and to monitor compliance.
Investors increasingly expect scenario analyses and climate transition plans. Work with finance, risk, and sustainability teams to develop scenario modelling aligned with NGFS pathways, quantify potential impacts, and incorporate findings into strategic planning. Communicate progress via earnings calls, investor days, and sustainability briefings.
Governance, risk management, and shareholder engagement
Boards must integrate the TSE restructuring into enterprise risk management. Update risk registers to include compliance with listing requirements, free float risks, and investor relations reputation. Establish key performance indicators (KPIs) such as independent director ratio, meeting attendance, shareholder proposal outcomes, and ESG rating trajectories. Provide regular updates to audit and governance committees.
Strengthen shareholder engagement. Develop annual engagement plans targeting domestic and international investors, proxy advisors, and ESG rating agencies. Prepare responses to typical concerns—capital efficiency, cross-shareholdings, climate risk, and board diversity. Implement feedback loops that inform board discussions and strategy adjustments. Ensure preparedness for activist campaigns by reviewing takeover defenses, disclosure readiness, and communication protocols.
General meetings must embrace digital transformation. Consider hybrid or virtual general meetings to facilitate participation by overseas investors, ensuring compliance with Japanese corporate law. Implement electronic voting platforms and provide multilingual support. Document meeting outcomes, questions, and follow-up actions to demonstrate responsiveness.
Sourcing and advisory relationships
Companies may need external advisors to meet new expectations. Engage legal counsel and governance consultants to review bylaws, board structures, and disclosure controls. Partner with ESG data providers to benchmark performance and populate sustainability reports. Evaluate investor relations service providers that offer global outreach, perception studies, and targeting analytics.
For translation and disclosure, select vendors capable of delivering high-quality English materials within tight deadlines. Establish service-level agreements covering accuracy, confidentiality, and compliance with Financial Instruments and Exchange Act (FIEA) requirements. Implement dual-language review workflows involving legal, finance, and IR teams.
Technology sourcing should prioritize investor relations platforms, ESG data management systems, and board portal solutions to support documentation and decision-making. Ensure platforms integrate with internal controls and provide audit trails for disclosures.
Implementation roadmap and monitoring
Create a TSE restructuring task force to oversee compliance. Define workstreams for governance reform, disclosure enhancement, capital strategy, and ESG reporting. Set milestones aligned with annual securities reporting deadlines, shareholder meetings, and sustainability report publication. Track progress through dashboards highlighting KPIs such as free float ratio, independent director percentage, ESG scores, and investor engagement metrics.
Monitor regulatory updates from JPX, the Financial Services Agency (FSA), and the Ministry of Economy, Trade and Industry (METI). The TSE has indicated ongoing reviews of listing rules and disclosure formats; stay engaged through industry associations (Keidanren, Japan Association of Corporate Directors) and comment on consultations. Benchmark against peers within the same segment to identify best practices and areas for improvement.
By embracing the TSE’s resegmentation as a catalyst for governance excellence, Japanese companies can attract long-term capital, enhance competitiveness, and meet the evolving expectations of global stakeholders. Proactive planning, disciplined execution, and transparent communication will differentiate leaders in the Prime, Standard, and Growth markets.
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