This article was first published in the October 2015 international edition of Accounting and Business magazine.

Japanese businesses have broadly welcomed the introduction of integrated reporting (IR) in Japan, although the majority appear to be waiting for others to take the plunge before committing to a system designed to promote better dialogue between companies and investors.

While only a handful have actually adopted integrated reporting to date, there has been a rush to comply with the new self-regulation requirement in the corporate governance code that came into effect in June. The revised code calls on companies to appoint at least two independent outside board members with no vested interests.

The importance of a major overhaul of the way Japan’s companies communicate their achievements and failures to investors was underlined by Shinzo Abe, the country’s prime minister, at The Economist’s Japan Summit 2015 in July.

At the summit, Abe played up the recent economic achievements of his government: net earnings of companies listed on the Tokyo stock exchange surpassed the ¥20 trillion (US$16.6bn) mark for the first time ever, wages have been rising, unemployment falling and fiscal 2014 tax revenues hit a 21-year high of ¥54 trillion (US$436.2bn).

The prime minister’s ‘Abenomics’ reforms are ‘picking up acceleration’, he insisted, with efforts to mesh with the global economy playing a key part.

‘Beginning last month, more than 2,000 publicly traded companies have adopted the corporate governance code,’ he said. ‘Over the last two years, the number of companies appointing independent, non-executive directors has roughly doubled.

‘And as for the stewardship code, which we acquired by learning from the UK, 191 institutional investors have adopted it as of now.’

Abe believes that Japan must strengthen its corporate governance and change the attitudes of Japanese executives to bring an end to inward-looking and risk-averse management.

‘A new mindset to be embraced should encourage the people of Japan to look beyond their home country at the far wider world and to set sail vigorously into the rough waters of international competition,’ he said. ‘That, fundamentally, sums up my own belief that is at the base of my growth strategy.’

At present, South Africa is the only jurisdiction that requires businesses to carry out integrated reporting, although three companies in Japan – Takeda Pharmaceutical, Showa Denki and EY Japan – took part in a pilot programme that started in December 2013. By 2014, 142 Japan-based companies had adopted IR, including convenience store chain Lawson and electronics giant Omron. Others, however, are biding their time.

Andrew Davies, partner in financial accounting advisory services at EY, says: ‘Firms here have welcomed IR because it makes sense, while the government is keen for them to adopt it because it fits in with the growth strategies of Abenomics.

‘Despite many Japanese companies embracing the principles of integrated reporting, universal adoption of this new reporting framework is still in its infancy. A lot of companies here have a wait-and-see mentality. They’re not willing to be the first because they already have a lot to do in terms of mandatory reporting – there has to be a tangible value in integrated reporting for them.’

Another concern will be the added cost and time required to produce the new type of report.

What’s more, according to Davies, many companies that claim to have introduced IR have not approached it in the best way. Corporations that merely bundle an existing corporate social responsibility report with their financial reports are missing the point, he says, as the value to the investor lies in the two sets of paperwork being fused, and the impact of decisions and actions on both sides of the equation being apparent.

Tomokazu Sekiguchi, technical manager of the Accounting Standards Board of Japan, says: ‘Some entities are being more proactive in providing greater disclosure and enhancing their communications with stakeholders, because they believe it will enhance their corporate value.’

Sekiguchi adds that many Japanese companies do not ‘strongly advocate the introduction of IR’ because its benefits for their business remain unproven. He says that until IR becomes a legal requirement, the majority of companies will put it on the back-burner.

However, Mikiharu Noma, associate professor at the Graduate School for International Corporate Strategy at Hitotsubashi University, warns that making integrated reporting a requirement may have the opposite effect from that intended. He says: ‘If Japanese companies are required to disclose IR by the Japanese government, they will resist adopting it. They are already required to provide quarterly earnings reports and this will just increase their investor relations costs.’

Toshifumi Takada, a professor in the School of Accounting at Tohoku University and chairman of the Japan Association of Auditing, is also opposed to making integrated reporting a requirement. ‘I and many others think that IR should not include compulsory disclosure, but that the system should expand naturally and without regulations,’ he says. ‘There is already a sense among the majority of Japanese CEOs that their companies are not for the stockholders, but that their primary focus is to contribute to society, both in Japan and, now, more globally.’

That attitude is one reason why Japanese companies are among the longest-lived in the world, often enduring for generations. The majority of listed companies in the West are relative youngsters. The six oldest businesses in the world are all Japanese. Osaka-based Kongo Gumi, which specialises in building shrines and temples, can trace its history back to the year 578, for example.

‘Japanese companies were among the first to have the concept of shared value,’ says Davies. ‘That’s not only the economic benefit of an entity, but also its positive impact on society.’

A reflection of that is the commitment to lifetime employment, which still exists in many Japanese companies despite the difficulties the country has faced since the economic bubble burst in the early 1990s. Equally, loyalty to suppliers, allegiance to the local community and an understanding of the need to protect the natural environment have long been factored into corporate decision-making in Japan.

That sort of social responsibility was always there, Davies believes, it was just not particularly well communicated to global, long-term investors. ‘That is why so many companies are old but still successful,’ he adds.

The International Integrated Reporting Council (IIRC) has welcomed efforts by Japan’s Ministry of Economy, Trade and Industry (METI) to promote IR as a way of improving the dialogue between companies and investors and enhancing corporate value creation.

METI has won praise for measures outlined in a ministry panel report calling for the creation of a ‘dialogue-rich nation’ in which companies comprehensively disclose information so that investors are better informed about decisions. Moves to promote ‘electronification’ (the application of new technology) to improve communications were likewise given a welcome.

Paul Druckman, CEO of IIRC, says: ‘I am delighted that METI has come to the same conclusions as the IIRC – that integrated reporting can be a means for enhancing value creation as a result of a better understanding by both the company and investors of the information that is material to the company.’