Dear reader,

the long-sputtering Japanese economy has fuelled an ever-louder chorus of demands from the media, political commentators and the electorate to reform corporate and regulatory practices. In response, the formerly ultra-conservative Ministry for Economy, Trade and Industry (METI) commissioned a high-level study Group in September 2008 to issue a set of recommendations to strengthen governance practices of listed companies.

F&C travelled to Tokyo in March 2009 to meet with four key members of the Study Group: METI, the Japanese FSA, the Tokyo Stock Exchange and the Nippon Keidanren, the powerful business association. Our aim was to encourage them to take account of recommendations contained in the Japan White Paper, a set of governance reform proposals that F&C had coauthored in 2008 on behalf ot the Asian Corporate Governance Association. Although our recommendations had been well received within regulatory circles, the Keidanren proved more resistant to change, objecting in particular to the need for indenpendt directors while presenting statutory auditors as a credible alternative.

The Study Group issued its report in July 2009, and despite addressing most of the areas we had requested, produced a somewhat anaemic set of proposals. F&C promptly met with the Japanese FSA, sponsors of the report, to provide feedback, and followd with a letter of 800 Japanese companies welcoming the spirit of the report but highlighting issues of particular interest to investors. We emphasised that:

- Contrary to the Study Group report, investors consider independent directors to be a vital component of a balanced and effective board, and should represent a minimum of one-third of directors.

- Capital-raising should not result in excessive dilution for existing shareholders and should not be used as an anti-takeover device. Transactions that are deemed material must receive prior shareholder approval.

- Companies should avoid clustering shareholder meetings within the same two-week period, which has the effect of discouraging thoughtful voting due to the concentration of volumes.

The recommendations of the Study Group had been intended to serve as a set of guidelines on best practice. However, following the surprise victory of the Democratic Party of Japan in early September, the new goverment has mooted the idea of mandating governance reforms that far exceed the current recommendations. While we are encouraged by these positive intentions, this is likely to meet with fierce resistance from the business community, and will, at best, take a number of years to take effect.

Manuela Fröhlich