Mr. Hideki Ito
Director-General and Head of the Policy & Markets Bureau
Financial Services Agency (FSA)
3-2-1 Kasumigaseki Chiyoda-ku
Tokyo, 100-8967 Japan
CC: Toshitake Inoue, Deputy Director-General, FSA
Hitoshi Hirokawa, Director, Corporate Accounting and Disclosure Division, FSA
Via email:
16th December 2022
Dear Mr. Ito,
Re: Quarterly corporate reporting
The International Corporate Governance Network (ICGN) is pleased to submit this letter to the Financial Services Agency (FSA) regarding quarterly corporate reporting requirements which, we understand, is under discussion at the Disclosure Working Group (DWG) convened by the FSA.
Led by investors responsible for assets of around $70 trillion, ICGN’s purpose is to convene capital market participants to develop, promote and embed high standards of corporate governance and investor stewardship to preserve and enhance long-term corporate value, for the benefit of economies, society, and the environment. For more information, visit www.icgn.org.
We have a long history of engaging with regulators and other stakeholders in Japan to support measures that enhance corporate governance and stewardship practices. This reflects the importance of Japan as a primary equity market for ICGN Members, where over 30% of the market capitalisation of the Tokyo Stock Exchange (TSE) is held by overseas investors.
1: Rationalization of Japan’s two-track system and ultimately abolishment of quarterly reporting
In Japan there are two kinds of quarterly report requirements: Quarterly Securities Reports required by the Financial Services Authority (FSA) according to the Financial Exchange and Instruments Act; and quarterly ‘Tanshin’ (“Short Notice”) Reports required by the TSE in accordance with Listing Rules. Both reports are very similar requiring companies to disclose quarterly consolidated financial statements. Quarterly Securities Reports require companies to provide more detailed information, for example shareholder status, any material business changes or contracts during the quarter, and a simplified audit “review.
Quarterly Tanshin Reports are generally released around five days prior to release of the Quarterly Securities Reports. Sanctions for false statements are stricter for Quarterly Securities Reports resulting in penalties including up to five years imprisonment, whereas false statements in the Quarterly Tanshin Reports will subject a company to being placed on the TSE Watch List.
We understand that the purpose of the forthcoming review of quarterly reporting in Japan is initially to rationalise these two approaches into a single mandatory quarterly reporting requirement. The aim is to reduce the reporting burden on companies as noted in materials published by the DWG1 and to consolidate oversight for quarterly reporting under a single agency.
ICGN supports the rationalization and proposed abolishment of quarterly securities reports as required by the FSA. However, we recommend that the quarterly Tanshin reports as required by TSE remain mandatory to ensure that investors and other stakeholders are regularly appraised of material factors impacting company performance, business models and strategy on a timely basis.
2. Merits and de-merits of quarterly reporting
We appreciate that the intention of the FSA may be to encourage companies and investors to take a longer term, perspective towards corporate value creation. There are merits and demerits associated with quarterly reporting and there is no global consensus.
Many investors regard quarterly reporting as an important element of transparency, as well as a positive discipline for management. Others believe that quarterly reporting causes administrative burden, and discourages long-term thinking by both companies and investors, for example relating to investments, capital allocation and stakeholder relations.
In the US, quarterly reporting is mandatory and, given the size and influence of the US financial markets, several countries have emulated this approach. By contrast, there is no longer a mandatory requirement for quarterly reporting for companies based in EU Member States. Instead, the decision whether to continue publishing quarterly reports is voluntary and at the company’s discretion. Today many quarterly reports in Europe focus on providing information on corporate strategy aimed at sustainable long-term value creation and relevant key performance indicators.
In the UK, many companies report on a six-monthly basis. This stems in part from the influence of the Kay Review on UK equity markets in 2012 which associated quarterly reporting with investor short-termism. Investors in the UK generally have strong relationships with UK listed companies – more so than perhaps in other markets – which may therefore partially compensate for the need for quarterly reporting. More generally, we observe that there has been a reduction in formulaic quarterly reporting and instead more trading updates. UK companies that still produce quarterly reports include those that have a dual listing in another market which requires quarterly reporting, or they compete with companies or have significant shareholder base in those countries.
3. ICGN position on quarterly reporting in Japan
Given the diverse perspectives of ICGN Members2 around the world, ICGN does not generally have a formal position on whether quarterly reporting should be mandatory. ICGN supports transparency as a guiding principle of corporate governance, and while we understand the arguments of how quarterly reporting might encourage short term thinking, there are arguments suggesting that relaxing reporting periods could result in a higher cost of capital because of greater investment uncertainty.
While ICGN does not have a global position on whether quarterly reporting should be mandatory, in the case of Japan, we would encourage the FSA not to abolish this requirement. The reason for this relates to the quality of corporate transparency and effectiveness of board oversight in Japan, comparative to other markets, leading to information asymmetry which negatively impacts the ability of investors to act as effective stewards in preserving and enhancing long term value on behalf of their beneficiaries and clients. Examples of how information asymmetry occurs in Japan include:
- Japan is the only market in the world where annual report (The Securities Report (Yuho) in Japan) is not posted well ahead of the AGM, and it is a huge barrier to shareholders fulfilling their stewardship obligations to oversee the company’s business model, corporate strategy, audited financial results, Key Audit Matters, and other corporate governance related information such as cross-shareholdings and executive remuneration. Yuho should be published well ahead of the AGM and with the full document in English.
- While the level of independent directors on TSE listed company boards has positively increased over recent years, this is still not commensurate with global standards.
- Many TSE listed companies are listed subsidiaries and have controlling shareholders with 50% or more voting rights which may minimise minority shareholder oversight and accountability.
Given the above examples, quarterly reports remain a source of valuable information for investors in TSE listed companies. We therefore reiterate the importance of maintaining quarterly reporting in Japan.
I hope that you have found our comments helpful, and we remain at your disposal should you have any questions. In this regard, please contact ICGN Board Member, Seiji Kawazoe by email at seiji_kawazoe@smatam.jp or ICGN’s Japan Advisor, Amane Fujimoto by email at amane.fujimoto@icgn.org.
Yours faithfully,
Kerrie Waring
Chief Executive Officer, ICGN
