Nomura backs mandatory external directors to boost Japan corporate governance

Broking and research giant Nomura has backed proposals by the Japanese government to introduce mandatory external directors to improve lagging corporate governance at the country’s listed companies.

Since coming to power last year Prime Minister Shinzo Abe has kicked off a series of reforms including a stewardship code and a version of the UK’s Kay Review into market short-termism.

A call for evidence and information from the Ministry of Economy Trade and Industry (METI) is focusing on the relationship between companies and investors. And earlier this year, the Tokyo Stock Exchange calculated an index of companies with strong “female empowerment” practices that outperformed the benchmark TOPIX index.

“The adoption of stronger corporate governance measures, such as the introduction of mandatory external directors that is being proposed for inclusion in the Abe administration’s growth strategy, would help raise the level of corporate governance in Japan and help further improve Japan’s SG [social and governance] scores,” Nomura Equity Research said in its latest review of corporate ESG performance.Nomura, using a methodology developed by Italian research company ECPI, found that the average ESG score for Japanese companies in 2013 (data as of 21 October) is 40.3, up from 38.9 in a similar study last year.

“Our latest global comparison of ESG scores shows that Japanese companies have achieved some modest improvements in their overall ESG scores as well as the component E and SG scores,” wrote Senior Strategist Kengo Nishiyama. “Overall, we think Japanese companies merit high evaluations from an ESG perspective.”

But the companies’ SG scores remain below the all-region averages and have more room for improvement than their E scores, Nishiyama added.

In December last year Nomura released a series of research reports showing a link between changes in companies’ ESG ratings and market outperformance. Analysts Sayuri Otsuka, Yusuke Takimoto and Masako Yamamoto demonstrated the impact that downgrades by ESG research providers can have on portfolios, although they said ESG information needed to be used in tandem with financial information.