Asset managers running money for the world’s largest pension fund, the $1.3 trillion Japanese Government Pension Investment Fund (GPIF), will have to demonstrate a full commitment to voting their shares and engaging with investee companies after the fund giant gave a huge boost to the development of investor/corporate governance in the country by signing the fledgling Japanese Stewardship Code. It commits GPIF to promote medium- to long-term sustainable corporate returns based on seven Principles. The Code, which takes its cue from the UK Stewardship Code, is also known as the “Principles for Responsible Institutional Investors” and is part of a series of corporate governance regulatory changes under the Abe government’s “Revitalisation Strategy” for Japan to exit deflation into sustainable economic growth. Japanese pension funds and asset owners had until the end of May to sign up to the Code’s initial list of signatories. The GPIF signing gives the Code a central role in Japanese institutional investment and will likely lead many Japanese asset owners to follow suit. GPIF outsources the lion’s share of its assets to a large number of external asset managers. The fund notes in its Stewardship signatory document that it will assume its Stewardship responsibilities via these third party fund managers. This is likely to prompt a large number of asset managers to review their governance offerings, notably in corporate engagement and share voting, to ensure they are qualified to run GPIF money. This could become increasingly important to asset managers outside of Japan given the current debate over whether Japanese pension funds – notably GPIF – could make a forecasted $200bn in foreign asset purchases to weaken the yen under Abe’s inflation drive.
Japan’s Stewardship Code closely follows the voluntary comply-or-explain regime of the UK Stewardship Code in encouraging asset owners and assets managers to vote their shares, publish their voting records, and engage in dialogue with companies on issues that could impact long-term share value, or to explain why they don’t. The concept is new in Japan where regulation tends to be rules based. Speaking at the recent RI Asia conference, Motoyuki Yufu, Director, Corporate Accounting andDisclosure Division in the Financial Services Agency (FSA) of the Japanese government, which is overseeing the Stewardship Code, said the Code encouraged “purposeful dialogue” between investors and companies, which he said was a relatively new concept in the country. In 2009, he said, a study revealed that 80% of companies never spoke with their investors and that the remaining 20% only spoke with investors by telephone: “We are looking to encourage a change of mindset here to promote the sustainable growth of companies.”
*The seven principles of the Japanese Stewardship Code are:
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1. Institutional investors should have a clear policy on how they fulfil their stewardship responsibilities, and publicly disclose it.
2. Institutional investors should have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it.
3. Institutional investors should monitor investee companies so that they can appropriately fulfil their stewardship responsibilities and support the sustainable growth of the companies.
4. Institutional investors should seek to arrive at an understanding in common with investee companies and work to solve problems through constructive engagement with investee companies.
5. Institutional investors should have a clear policy on voting and disclosure of voting activity. The policy on voting should not be comprised only of a mechanical checklist; it should be designed to contribute to the sustainable growth of investee companies.
6. Institutional investors in principle should report periodically on how they fulfil their stewardship responsibilities, including their voting responsibilities, to their clients and beneficiaries.
7. To contribute positively to the sustainable growth of investee companies, institutional investors should have in-depth knowledge on the investee companies and their business environment and capabilities to appropriately engage with the companies and make proper judgments in fulfilling their stewardship activities.
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