Corporate Governance Code: Firms Must Move Away from Cash-Retaining Management Style

Editorial

14:00 JST, April 20, 2026

Although a defensive management style of retaining cash and deposits has been identified as a challenge for the Japanese economy, it shows no signs of changing. Funds should be redirected toward investments for growth based on the set-to-be-revised Corporate Governance Code.

The code established by the Financial Services Agency and the Tokyo Stock Exchange can be described as a set of principles requiring listed companies to take actions that enhance corporate values. Since companies must explain to investors if they fail to comply, the code effectively has binding force.

The code was first formulated in 2015 under the administration of then Prime Minister Shinzo Abe as a pillar of its growth strategy, and stipulates measures such as enhancing dialogue with shareholders and strengthening the functions of the board of directors by increasing the number of outside directors.

There is no doubt that the code, revised in 2018 and 2021, has been effective to a certain degree thus far. Corporate profitability has improved, and foreign investment has increased. The Nikkei Stock Average has reached a record high and is approaching 60,000.

The FSA and others are currently considering revising the code for the first time in five years, with a target date of this summer. This is because the impasse in reform has become increasingly apparent.

In 2023, to accelerate the reform, the TSE requested that listed companies engage in corporate management that takes into account stock prices and “capital efficiency,” which shows how efficiently funds from investors are utilized.

As a result, reckless stock buybacks aimed solely at driving up stock prices have increased.

In fiscal 2024, total dividends paid out also reached a record high of ¥23 trillion. Unless companies stop focusing solely on measures to give returns to shareholders and instead strengthen strategies to enhance the appeal of their products and services, the public will not feel the benefits, and economic growth will remain limited.

Although such issues have repeatedly been pointed out, in reality, corporate retained earnings continue to rise. In fiscal 2024, retained earnings stood at about ¥640 trillion, nearly doubling over the past decade. Cash and deposits held by large corporations are said to amount to about ¥80 trillion. These funds are not being sufficiently channeled into capital investment or wage increases.

The draft of the revised code explicitly calls for boards of directors to continuously verify whether their companies are effectively utilizing management resources such as cash and deposits, as well as real estate.

The revised code will make it difficult for companies to simply leave their cash and deposits idle. They must take risks and invest in growth sectors.

Strengthening corporate governance is also a key challenge for achieving sustainable growth.

This is because there are countless cases of companies merely introducing outside directors as a formality, without any substance. Recently, massive accounting fraud was uncovered at major motor manufacturer Nidec Corp., exposing the dysfunction of its board of directors.

It is appropriate that the revised code will require independent outside directors to take a proactive role in the appointment and dismissal of members of management teams. Companies must devise concrete measures based on the code.

(From The Yomiuri Shimbun, April 20, 2026)