What is corporate governance and why?

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Structure for transparent, fair, timely decision-making by companies, with attention to shareholders, customers, employees, communities

Japan’s Corporate Governance Code, which was issued by the Tokyo Stock Exchange on June 1, 2015, defines Corporate Governance as “a structure for transparent, fair, timely and decisive decision-making by companies, with due attention to the needs and perspectives of shareholders and also customers, employees and local communities”.

Seeking sustainable corporate growth and increased corporate value over the mid- to long-term

The subtitle of Japan’s Corporate Governance Code is its mission statement: “Seeking sustainable corporate growth and increased corporate value over the mid- to long-term”.

Corporate governance has been analyzed in great detail in Professor John Kay’s analysis of UK’s capital markets: “The Kay Review of UK Equity Markets and long term decision making“, which was triggered by certain M&A transactions among other factors, and published on 23 July 2012.

“The Kay Review of UK Equity Markets and Long-Term Decision Making” has been archived in UK’s National Archives here.

The Kay Review analyzes UK’s capital markets in depth, and argues that its companies’ duty to be successful in the long-term, and its only the success of companies that brings wealth to all stake holders and people who invest in companies, in many cases pensioners. Over the years a fine grained system of specialized service providers has developed between companies on one side, and individual investors on the other side. Professor Kay argues that this system of intermediaries (fund managers, analysts etc) can be seen as “overhead” and needs to be as efficient as possible.

Capital markets need to be built on long term trust and stewardship, not on anonymous one-time monetary transactions (John Kay)

Overall the capital market system needs to be built on long term trust and stewardship, not on anonymous one-time monetary transactions.

Short term focus on quarterly financial performance may cloud the view on long-term success and investment (John Kay)

The Kay report had important impact, for example it led to the end of the requirement of quarterly financial reports by UK companies, as we discussed here.

Martin Lipton, of the NY law firm Wachtell, Lipton, Rosen & Katz, in an article published on the Harvard Law School Forum on Corporate Governance and Financial Regulation blog encourages the US Securities and Exchange Commission (SEC) to keep the UK developments in mind, when reforming the reporting requirements for US corporations, and also calls for an end to the requirement of quarterly reporting.

Why end the requirement of quarterly financial reports? Because short term focus on quarterly financial performance may cloud the view on long-term success and investment. Intense discussions between fund managers and management are strongly encouraged.

Will the end of quarterly financial reporting reach Japan?

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