Japan Stewardship Code update to tighten engagement reporting expectations for investors and service providers.

Council of experts calls for measures to deepen governance.

The next revision of Japan’s Stewardship Code looks set to ramp up engagement reporting expectations for investors and service providers.
In a new report, which makes recommendations to inform the next version of the code, a council of experts has called for measures to deepen the country’s corporate governance reforms.
To date, Japan’s 2014 Stewardship Code and its 2017 revision are widely regarded as having spurred investor-company dialogue and transparency, with the aim of promoting the mid- to long-term value of companies. The 2017 revision of the code recommended investor signatories provided voting records on an agenda basis. Now over 100 are starting to do so, compared to just 17 at the end of June 2017.
But the new report recommends that, on top of this, investors should report on their reasons behind voting decisions, their stewardship activities with companies before voting, and make a self-evaluation of their stewardship activities. The report reads: “Dialogue with investee companies remains formalistic and does not contribute to enhancement of mid- to long-term corporate value.”
It continues: “There are cases of institutional investors, who while demanding more extensive disclosure from companies, are not being proactive in fulfilling their own disclosure responsibilities.”
The recommendations, put together by a Council of Experts made up of both investors and corporates (Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code), are intended to provide guidance for the next revision of the Stewardship Code, which will be discussed and put together by another council, expected to be convened in early autumn this year.
Kazutaka Kuroda, Sustainable Finance Specialist at Japan Research Institute, said: “Some dialogues are conducted without clear objectives. Therefore investors and companies just meet and talk, and count that as evidence of dialogue. However, there is little impact on the companies’ strategies and business conducts.”
Toshiaki Oguchi, Representative Director at Governance for Owners Japan, who is on the Council, said that passive investors in particular face a high voting burden when the Japanese AGM season comes around, leading them to rely on guidelines to make voting decisions rather than discussions with and deeper analysis of the company. Oguchi said: “Physically speaking it’s impossible for the asset manager to talk with all their portfolio companies before voting. But asset managers have to think about how to make their voting more effective at contributing to corporate value, even if that is burdensome.”
The code was closely modelled on the UK’s Stewardship Code, and similarly adopts a “comply or explain” approach. Investors are expected to disclose items based on the principles publicly on their website.The recent recommendations are the result of a review, which started in November 2018, of how investors and companies have approached the Corporate Governance and Stewardship Codes since their last revisions. Among the 18 members of the council are Hiroki Sampei (Head of Engagement at FIL Investments Japan), Scott Callon (CEO at Ichigo Asset Management), and Yoichiro Iwama (Senior Advisor, Norges Bank Real Estate Management). Chairing the Council is Kazuhito Ikeo, Professor of Economics and Finance at Rissho University.
The report also raises a string of recommendations for service providers, suggesting proxy advisors make recommendations “based on correct information” by:

● securing sufficient and appropriate human resources and organizational structures
● disclosing processes for developing voting recommendations
● directly and proactively engaging with companies as necessary

Oguchi explained: “The key of corporate governance reform in Japan is to deepen from ‘form’ to ‘substance’. ‘Correct information’ here means ‘substantive’ information with respect to individual companies.”
“The council recognised that proxy advisors are widely used by asset managers amidst expanding passive investment management and pointed out that proxy advisors may not have sufficient human and operational resources necessary for making “substantive” evaluations of companies’ specific circumstances, including AGM director election proposals.” The report recommends that asset managers should in turn provide explanations on which proxy advisors they use and why, their processes to confirm the advice of proxy advisors, and how they use the advice. Another important issue, according to the report, is the strengthening of asset managers’ corporate governance, including conflict of interest management. It also notes that corporate pension funds have signed up to the Stewardship Code in limited numbers. The report reads: “It has been pointed out that the backdrop to this limited participation is that the benefits and responsibilities of stewardship activities expected of corporate pension funds are not well understood. It is thus important to promote measures to support the stewardship activities of corporate pension funds in collaboration with the business sector and other stakeholders. Collective engagement and the escalation of corporate engagement – issues around which there is ongoing confusion among Japanese investors – are referred to in passing, saying only that they have “been raised at Council meetings and will also continue to be reviewed”.

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