What is going on in the universe of corporate governance in Japan today seems revolutionary compared with slow discussions of many years in the past. I can see two distinguished differences. First, the present movement is wholly due to the leadership of the Government of Prime Minister Shinzo Abe. Each ministry and stock market including the FSA (Financial Services Agency), TSE (Tokyo Stock Exchange), METI (Ministry of Economy, Trade and Industry), MOJ (Ministry of Justice) and even the MOF (Ministry of Finance) have been harmoniously working together under his policy, “Abenomics,” which aims to revitalize Japan in the global markets. Second, corporate governance has been characterized as a fundamental tool for Japanese companies and domestic institutional investors to realize higher returns in the big framework of Abenomics, rather than superficial discussion about independence.
When he became PM in December 2012, the most pressing issue Abe faced was to restructure the Government Pension Investment Fund (GPIF), the largest public pension fund in the world with AUM of about $1.2 trillion, for the social security of the next and further generations. One research forecast noted that the GPIF would collapse in the 2040’s because of overpayment of pensions to the Baby Boomer generation and stagnant investment returns, having for many years invested more than 60% of AUM in Japanese Government Bonds. That situation was expected to worsen if Abenomics successfully worked to get the country out of deflation it had experienced since the 1990’s.
The GPIF discussion relied on a competitive stock market with good Corporate Governance, not only on issuers’ sides but also on domestic investors’ part, to yield higher profitability and sustainable growth. Also, the capital efficiency of Japanese companies was a critical issue that required focus, with more than half of listed companies enjoying net cash positions with low dividends and weak share buyback schemes.
The FSA initiated the discussion of a “Stewardship Code” for institutional investors, including asset owners, at the Council of Experts in August 2013, and formed the final Code in February 2014. It aimed to guide domestic investors in fulfilling their genuine fiduciary duty. The FSA also started another Council of Experts for a “Corporate Governance Code” for issuers in August 2014, developing a final draft in December that was under consultation until the end of January 2015. It is now expected to go into effect for the annual general meeting season. The code aims to motivate issuers to pursue high capital efficiency based on corporate governance systems with good independence, and at least two independent outside directors on corporate boards.
The TSE also played a very important role by setting up the “JPX-Nikkei 400 Index” in January 2014, picking up 400 companies with high return on equity and reasonable market capital with relatively good principles for corporate governance. So far, it has worked well, prevailing among management of the companies and investors that have an understanding of how ROE can make a difference. Again, it is important to say that this is just a beginning of true and long lasting Corporate Governance discussions in the stock market as a vehicle to revitalize the Japanese economy.
To summarize today’s situation, it takes time for issuers and domestic investors to fully understand the value of corporate governance. It is easy to blame either or both for the lack of corporate governance in Japan in the past. However, in my view, the critical position was asset owners who were not interested in attaining long-term, sustainable growth and returns for future generations. We need to keep discussions current to put the investment chain in Japan back on a globally common track. At the same time, further investments are needed in Japanese equities from outside the country with good support for Abenomics and ministries which promote further efforts for engagement and dialogue between issuers and investors.Hiroshi Komori is Associate General Manager at Sumitomo Mitsui Trust Bank, one of largest registrars in Japan, trying to bridge a gap between Japanese issuers and foreign investors in the fields of Corporate Governance, Environmental, Social issues, IR, etc.