Japan’s institutional investors urged to step up on stewardship

Japan’s expert governance group releases recommendations for investors

A group of experts tasked with the effective implementation of Japan’s stewardship code has issued recommendations encouraging asset owners and asset managers to drive the ongoing corporate governance reform “from form to substance”, with a focus on enhanced disclosure of voting policies, among other methods.
The Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code has called on institutional investors to acknowledge their ability to wield influence in the management of investee companies, and ultimately in the creation of sustainable economic growth.
Part of Prime Minister Shinzō Abe’s economic policies, or ‘Abenomics’, the governance reform saw the publication of both codes (the stewardship code in February 2014 and the corporate governance code in June 2015) following landmark corporate failures such that of Olympus.
The Council, established in August 2015 – soon after the emergence of Toshiba’s governance scandal – has recently issued an opinion statement with a number of recommendations. It hopes they will be taken into account ahead of a revision of the code, which so far has 213 institutional investors as signatories.
Notably, the recommendations point to the importance of institutional investors disclosing (on a ‘comply or explain’ basis) not only their voting records, but the results and reasons behind their vote, at investee-company level, to enhance transparency and accountability.
The Council stated: “The ultimate beneficiaries of asset owners consist of a wider range of individuals, including pensioners. In many cases, it could be said that ultimate beneficiaries … are the Japanese citizenry itself.”
In particular, in relation to the internal governance of asset management companies, the Council recommended preventing, and managing effectively, potential conflicts of interests – for example, when the asset manager belongs to a financial group that also offers other services to the investee company; or when it manages the pension fund of such companies.In addition, the Council has called on asset owners to take seriously the oversight of asset managers’ stewardship activities, saying that both owners and managers “have a direct responsibility” to secure the ultimate interest of their beneficiaries.
In that regard the Council recommends institutional investors challenge investee companies as a key part of their stewardship activities, engaging in “in-depth constructive dialogue on various corporate challenges, including management strategies”.
Another important recommendation for asset owners is to clarify what they expect from asset managers, including the exercise of voting rights, “instead of mechanically accepting asset manager’s policies without any verification”.
The Council’s recommendations came amidst the news this Autumn of two ongoing corporate cases which are seen as a crucial test for Abenomics’ governance reforms.
First, the takeover bid of kimono manufacturer Sagami by two private equity firms, in which the lower offering (JPY56 versus JPY90 per share) has so far been preferred – a decision greeted with great dismay by investors and some market commentators.
Second, a damning report on the financial position and governance standards of pneumatics manufacturer SMC Corporation, published last week by Well Investments Research. The report, contested by SMC, takes issue with the independence of the long-serving external auditor and the lack of diversity within its board.
Meanwhile, Japanese sources told RI that another council established by the Financial Services Agency, the Council of Experts on Audit Firm Governance Code, has this month published proposals to improve Japan’s audit code as part of the ongoing reforms.