JCGindex is an index to estimate the degree of compliance with the JCGR Corporate Governance Principles. The range of the index is from 0 to 100, in case the company complies with the Principles fully, then the index is 100. The source of information to estimate the index is the JCGIndex Survey conducted by us. We send out and compile JCGIndex Survey questionnaire to the representative of the first section of TSE listed companies.

To quantify the degree of compliance with the Principles, we take several steps. The Principles can be broken down to nine groups of questions:

1. 1. Management’s attitude toward Corporate governance
2. 2. Clear goal setting of corporate performance
3. 3. Responsibility system of CEO
4. 4. Composition of the board of directors centered on independent directors
5. 5. The governance system of the board with sub-committees
6. 6. Management system to achieve performance goals
7. 7. Risk management based on compliance and internal control
8. 8. Accountability through information activities such as IR
9. 9. Transparency to all stakeholders

In turn, these questions are classified into the following four broader categories:

1. I. Corporate performance targets and responsibility system
2. II. Functions and structures of the board of directors
3. III. The management system of CEO
4. IV. Communication and Transparency with stakeholders

Lastly, scoring the four categories and summing up to estimate the JCGIndex to show the state of corporate governance of the company. If all four categories are perfect, the JCGIndex take the value of 100.

JCGR hopes that your interest in JCGIndex will bring mutual understandings of better corporate governance, and eventually, the state of corporate governance in Japan shall be enhanced.

Our View on Modern Corporation

The purpose of corporate governance is to derive good-quality Management from corporate executives. It has to be good for all stakeholders involved with the company.

The shareholders entrust their assets to the Board of Directors and expect the profit from the business operations. The revenue is brought by a stakeholder called the customer. The profit is the residual after all expenses have been paid from the revenue to stakeholders, such as employees, business partners, local/global environment, and creditors. That means, the profit is not determined in advance, i.e., shareholders’ risk-bearing.

Because of the risk-taking, the shareholders are given the position of the owner of the corporation. In the capitalist economy, investors in principle run a company as owners, but in a stock company with a large number of shareholders, the shareholders do not run the company themselves. They choose directors at the shareholders meeting and delegate the Management of the company to the board of directors.

The board of directors appoints an able person as the CEO and delegates the company to the CEO and its team. In turn, the board of directors oversees the CEO management to ensure that they do their best. It is called the governance of the board of directors. It is a modern governance system common to all countries in the world.

Good quality of Management means, after satisfying the stakeholders other than the shareholders, earning the profit to the stockholders that exceed the risk borne by the shareholders. Based on generally accepted assumption of “Going Concern,” the Management continues to make long-run profits, the value of the investment by shareholders, i.e., the shareholders’ value increases. Consequently, the asset of shareholders will increase. For example, the asset that people are accumulating for pensions can also be increased by investing in stocks, and people might enjoy greater pensions.

In order to realize such high-quality Management, it is essential to set clear corporate performance targets to executives and to ensure a system that enables them to be responsible. It is desirable to separate corporate executives and board members who oversee the executives. This is the separation of governance and Management, where independent directors play a critically important role.