In recent years, the number of corporate scandals
occurring at listed Japanese companies has been increasing.
These risk not only damaging the company itself but potentially
might also result in a loss of credibility of the capital
market as a whole. With that in mind, it has become
increasingly necessary for listed companies to implement
continuous measures to prevent such scandals from
On March 30 2018, the Japan Exchange Group announced the
Principle for the Prevention of Corporate Scandals at Listed
Companies (Principle) to assist Japanese corporations with
The Principle is intended to act as a guide, from the
viewpoint of preventing the impairment of corporate value, for
all listed companies in Japan taking measures to prevent the
occurrence of scandals and to prioritise the expected
principles of conduct. The Principle includes the following six
tenets of conduct to serve as the basis for the prevention of
corporate scandals at listed companies. Although only brief
descriptions are provided, the general content of each
principle is as follows.
- Principle 1: Understanding the actual conditions;
- Principle 2: Fulfilling responsibilities
- Principle 3: Two-way communication;
- Principle 4: Detecting 'the seeds of fraud' and
- Principle 5: Applying consistent management to the group
as a whole; and
- Principle 6: Maintaining a sense of responsibility for
the entire supply chain.
Principle 1 sets out the importance of ascertaining the
state of compliance in the listed company as the first step in
efforts to prevent corporate scandals.
Principle 2 explains the importance of fulfilling the
responsibilities of management and the auditing and supervisory
Principle 3 explains the need to foster a sense of unity
throughout the company by enhancing communication between
management and front-line departments.
Principle 4 explains that compliance violations, which can
lead to serious scandals, are 'the seeds of fraud' and that,
through the efforts in Principles 1 to 3, perceiving and
responding quickly to these violations is at the core of the
prevention of corporate scandals.
Principle 5 discusses the importance of ensuring that
effective compliance management is carried out across an entire
Principle 6 concerns issues in the modern trading structure,
focusing on the possibility that corporate scandals involving
parties other than the company itself may still impact the
company's main business.
Listed companies are not mandatorily required to comply with
the Principle, but rather the Principle is positioned as a
voluntary policy. Accordingly, no penalties or sanctions will
be imposed on any listed companies if they do not adhere to the
Principle. However, if the management of a listed company fails
to respond in a genuine fashion to the Principle, it is likely
to be subject to strict evaluation by the stakeholders. It
should be noted that if a corporate scandal resulting in
impairment of corporate value and damage to the stakeholders
occurs in a non-compliant company, the Principle may be
referred to in determining management's breach of its duty of
care regarding its legal responsibility to the stakeholders. As
mentioned above, the Principle merely provides guidelines for
listed companies and does not provide any specific measures.
The actual implementation of the Principle is left to the
discretion of each listed company.