Corporate Governance Regulation by Comply-or-Explain as Seen from Soft Law and Self Regulation

Regulation of corporate governance can be described as a multi-layered system consisting of (hard) law legislature, industry self regulation and influence by other actors such as institutional investors.

While soft law in general and corporate governance codes in particular are regarded to have an enormous effect on the way corporate law is shaped around the world, the legitimacy of state induced self regulation and its handling in practice faced grave concerns and discussion in the German legal context. In the meanwhile, Japan has witnessed an expansion of soft law into the realms of corporate law regulation during the past decade that cumulated in the recent introduction of rules subject to the so called “comply-or-explain” mechanism on all three regulatory levels: The new Art. 327:2 of the Companies Act 2015 regarding the implementation of an outside director, Japan’s Corporate Governance Code that became part of the Tokyo Stock Exchange’s Securities Listing Regulations on 1 June 2015 and the Stewardship Code for institutional investors published by the Financial Securities Agency in 2014. All three reforms may be considered soft in a sense that they lack a final imperative, as companies and investors addressed may deviate from those rules if they disclose their reason for doing so. Although the respective provisions look similar on the outset, each may play out in a different way as the “explain” element is linked with different enforcement strategies.

In this talk, I focus on theoretical aspects of the comply-or-explain mechanism and soft law in general as well as the purpose this new type of rules are supposed to play in Japanese corporate governance regulation. On a more abstract level, I aim at contributing to the question on the conditions for successful self regulation by drawing from insights of both the German and Japanese debate.

Michael Pfeifer is a doctoral candidate and research associate at Goethe University Frankfurt as well as a scholarship holder at the DIJ. He graduated from Bucerius Law School in Hamburg and underwent legal training in Hamburg, Düsseldorf and Tokyo.