Following the launch of the Japanese Stewardship Code, an investor delegation from the Asian Corporate Governance Association (ACGA) recently traveled to Japan. Together with representatives from parties such as BlackRock, CalPERS and Norges Bank IM, Carola van Lamoen, Head of Governance and Active Ownership, observed that Japanese corporate governance is rapidly gaining momentum.
Top-down focus gives corporate governance a boost
Last year, within the framework of a comprehensive regulatory reform program, Japanese Prime Minister Shinzo Abe announced measures to boost corporate governance. This became known as the ‘third arrow’ of Abenomics, which consists of financial stimulus, monetary expansion and structural reforms. This has prompted the introduction of the Japanese Stewardship Code in February 2014. Japan is the first Asian country to adopt such a code, and both Japanese and international investors have been encouraged to sign it. To date, it has been signed by over 160 institutional investors who commit to voting, engagement and transparency on their efforts in these areas. Robeco will also sign the Code. Furthermore, Japan’s first Corporate Governance Code is also on the way.
Companies open up
To assess Japanese companies’ progress on corporate governance, Carola van Lamoen, Head of RobecoSAM’s Governance & Active Ownership team, traveled to Japan in early September as part of a delegation from ACGA. The delegation visited a number of companies, some of which RobecoSAM is engaging with, such as Toyota, Toshiba and Tokyo Electric Power Company. The visit confirmed once again that face-to-face contact is invaluable and cannot be fully replaced by e-contact, especially in Japan. We observed a distinct change in the stance of Japanese companies, which were more open on their corporate governance efforts than they had been in the past. This rapid change has been driven in part by the regulatory push, but also because Japanese companies are increasingly talking to foreign investors who attach great importance to sound corporate governance. For instance, Toyota, which the delegation visited at its corporate headquarters in Toyota City, was one of the first companies to implement governance reforms by, among other things, appointing three outside directors to the Board. This was an important step, as cultural and linguistic factors can sometimes be an obstacle to appointing outside directors. Canon and other companies soon followed Toyota’s lead. Meanwhile, the recently introduced ‘comply or explain’ requirement to install outside directors has steadily contributed to an increase in the number of independent board members. While only 30% of Japanese companies had independent directors in 2004; by 2013 this figure had grown to 74%.
Government Pension Investment Fund
The delegation also met with 10 representatives from the Government Pension Investment Fund (GPIF), the world’s largest public-sector investor with some EUR 0.9 trillion in assets. This key Japanese and global player has also signed the Japanese Stewardship Code and has encouraged its external managers to do the same. As GPIF is seen as a role model for other financial institutions, many Japanese asset managers have followed its lead and more are expected to do the same. GPIF is also in the process of learning how to assess the quality of active ownership services it receives, and therefore was interested in discussing the topic with the ACGA investor delegation.
An index of investor-friendly companies
Another development driving Japanese companies to embrace corporate sustainability was the January 2014 launch of the JPX-Nikkei Index 400 by the Japan Exchange Group, Tokyo Stock Exchange and Nikkei. This index contains 400 companies with high returns on equity and investor-friendly corporate governance, which is assessed in a qualitative manner. In May 2014, GPIF declared that it would switch from using the Topix to the JPX-Nikkei Index 400 for some of its domestic passive equity mandates. Several ETFs and passive funds are also tracking the new index. There is, however, some criticism from specialists, particularly on the high turnover in the index and the lack of transparency on the selection criterion for inclusion in the index, but we expect improvements to be made.
Japan to become more attractive to investors
Some Japanese analysts fear that the change is advancing too quickly. Changes in corporate governance at Japanese companies and investor requirements resulting from the Stewardship Code have not been adapted to specifically Japanese circumstances. This could pose a potential threat to the long-term viability of the governance reform program. Although these are valid concerns, the rapid pace of improvement and Japanese companies’ broad adoption of measures to raise the quality of their corporate governance give us confidence that Japanese companies will go ahead with the reforms. An ACGA study in mid-2014 found that all large cap Japanese companies now report on sustainability. Many large cap reports are sophisticated and strategic in nature, with sustainability strategies going out to 2020. The fact that RobecoSAM is voting and engaging with Japanese companies is valuable, as the Stewardship Code requires asset managers to show they are practicing active ownership. With more than 160 domestic and foreign signatories, we believe the Stewardship Code will be an important catalyst for improved corporate governance in Japan over the long run.