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Japan’s Ito Review proposes company-investor forum to foster sustainable value creation

Major government-backed report also looks at asset manager and analyst incentives

A major report backed by the Japanese government has called for the formation of a forum where investors and companies can get together to help create sustainable value.
The Ito Review – whose final report has been published in English – was chaired by leading academic Kunio Ito and backed by the Ministry of Economy, Trade and Industry (METI). The report, modeled on the UK’s Kay Review, also looks at asset manager and analyst incentives as well improving the ‘investment chain’.
Like Kay, Ito recommends an engagement platform; the proposed “Management Investor Forum (MIF)” would provide for “periodic face-to-face interaction between company management and investors” and serve as a forum to discuss and enhance dialogue and engagement. “Continued discussion” at the forum could lead to “concrete policies and practices aimed at realizing sustainable corporate value creation.”
“There is no possibility for genuine dialogue with investors who only invest based on short-term earnings estimates,” Ito, Professor at the Graduate School of Commerce and Management at Hitotsubashi University, reckons. The UK’s Investor Forum is currently being formed, though some in the market query how effective it will be.
“It is expected that the proposed measures in this report will help to mitigate short-termism in the capital markets and promote mid/long-term investments,” Ito says. However it should be augmented with “reforms in the incentive structures for asset managers and securities analysts”.The report says: “There is room to reconsider asset manager compensation schemes that excessively focus on short-term (e.g. quarterly) performance results. Similarly, given that strong analytical capabilities of the analyst community are essential for healthy capital markets, the incentive and compensation structures for analysts must also be reviewed.”

The 132-page report also notes that Japan’s JPY800trn (€5.8trn) of household savings could be deployed to make the investment chain much more robust. “The individual investor community has the potential to become a massive ‘supporting community’ of the mid/long-term corporate value creation process,” the study argues. The project was launched in July 2013 and an interim report was released earlier this year.

The project had submissions from a range of international investors such as Baillie Gifford, CalPERS, Fidelity Worldwide Investment, Universities Superannuation Scheme, RPMI Railpen Investments and Legal & General.
There was also input from the Network for Sustainable Financial Markets, the International Corporate Governance Network and the Asian Corporate Governance Association.

The project members include a wide range of academics and executives at domestic companies and institutions including the likes of Sony, Fuji Heavy Industries and Nissan, Tokio Marine Asset Management, Nippon Life and Nomura. Link to final report.