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Japan: Dealing with scandals

On February 24 2016, the Japan Exchange Regulation (JPX-R) established the Principles for Dealing with Scandals at Listed Companies (the Principles)

Yuhei Sakao

On February 24 2016, the Japan Exchange Regulation (JPX-R) established the Principles for Dealing with Scandals at Listed Companies (the Principles). Note that JPX-R only published a Japanese version of the Principles and, at the time of writing, has not published an official English translation.

The Principles indicate the following four points, of which the listed company involved in a scandal should take note. They cover the time at which the company becomes aware of the scandal involving it (including scandals involving its group companies), to the time when it implements measures to prevent recurrence. They are:

(i) determining the root cause of the scandal;

(ii) securing the independence, neutrality and expertise of the third-party committee (a direct translation of the Japanese term daisansha-iinkai) in the case where it is established;

(iii) deciding on effective measures to prevent recurrence and implementing these measures promptly; and

(iv) disclosing information promptly and appropriately.

The Principles do not adopt a rules-based approach which would require each listed company to follow the same rules. Rather, they adopt a principles-based approach which aims at listed companies recognising and sharing the important values represented by the Principles and expects each listed company to interpret the Principles according to the company's individual circumstances.

In recent times, this principles-based approach has been adopted on many occasions in Japan. Specific examples include: the Principles for Responsible Institutional Investors (Japan's Stewardship Code), established by the Council of Experts Concerning the Japanese Version of the Stewardship Code on February 26 2014; the Principles for Equity Financing, established by JPX-R on October 1 2014; and, Japan's Corporate Governance Code, established by the Tokyo Stock Exchange on June 1 2015.

JPX-R will not take measures (including penalties and improvement measures) against listed companies based solely on the fact that the companies are not following the Principles; however, the Principles will have an impact on the risk and crisis management practices of listed companies.

It is important for listed companies facing scandals or irregularities to comprehend the content of the Principles. They should examine how to overcome any resulting difficulties in view of the recent cases where well-known listed companies have engaged in misconduct such as data manipulation and accounting irregularities and then fallen into serious crises.

Yuhei Sakao

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