Japan is set to follow the UK by introducing an investor Stewardship Code based on a voluntary comply-or-explain regime that will encourage 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. The country’s Financial Services Authority (FSA) has published its draft “Principles for Responsible Institutional Investors”, which it refers to as “Japan’s Stewardship Code”, as part of the Abe government’s “Revitalisation Strategy” to kick deflation and spur economic growth. It said the Code aimed to promote medium- to long-term sustainable corporate returns based on seven principles to guide investors on their stewardship responsibilities. The FSA said this meant that asset owners should have a stewardship policy to communicate to their asset managers. The managers, in turn, would vote their shares, publish the results and be in regular dialogue with companies on problem issues such as “governance, strategy, performance, capital structure, and risk management”. It said any owner or manager who did not would have to ‘explain’ why a stewardship approach was not compatible with their business strategy.
The Japanese Stewardship Code is close to the UK version, which was introduced in July 2010, although it is more explicit in encouraging constant investor/corporate engagement based on promoting sustainable corporate growth.The principles of the Code are:
1. Institutional investors should have a clear policy on how they fulfill 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 fulfill 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 fulfill 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.
The principles, which are out for comment by relevant investor and corporate organisations, form part of a series of major institutional investment recommendations coming through this year. The FSA also has a Panel for Vitalizing Financial and Capital Markets, which is looking at how to enhance long-term investment returns by Japanese public pension funds, especially the 124 trillion yen ($1.2 trillion) Government Pension Investment Fund, the world’s largest pool of retirement savings, which may begin to look more internationally at its investments with external fund managers. Separately, “The Corporate Reporting Lab” supported by the Japanese Ministry for Economy, Trade and Industry (METI), aims to facilitate dialogue between Japanese companies and domestic and overseas investors.The Corporate Reporting Lab links to a special project on “Competitiveness and Incentive Structures for Sustainable Growth”, described as “Japan’s Kay Review”, which aims to enhance the ability of Japanese companies improve their long-term performance and create value. Finally, an initiative called The Principles for Financial Action (PFA)”, supported by the Ministry for Environment and the UNEP Finance Initiative, which has 188 signatories, includes a policy recommendation to create “a Japanese version of the PRI” and is focused on sustainability and ESG factors in institutional investment: Link