Governance push in Japan
The Japan Engagement Consortium aims to improve Japanese corporate governance standards at the same time as companies realise they must improve to attract investors, reports Nina Röhrbein
The financial crisis has highlighted the fact that when it comes to governance, global is best.
Like in Europe or the US, governance issues have been climbing up investors’ agendas in Japan. “Governance issues in Japan vary from dividend problems to the independence of the company board and are widespread across industries such as retail, manufacturing and services,” says Kenji Kodama, general manager, corporate strategy, at Tokio Marine Asset Management (TMAM).
In 2004, Governance for Owners (GO), an independent partnership between major institutional share owners, a long-term financial backer, and GO senior executives, was started with the aim of adding long-term shareholder value for clients by exercising owners’ rights.
A year ago, its Tokyo-based entity, GO Japan, launched the Japanese Engagement Consortium (JEC), in which Japan-based TMAM has a 40% stake, to facilitate engagement between international institutional investors and Japanese companies in order to improve long-term shareholder returns.
So far, the JEC has three members - TMAM, the UK’s Railways Pension Trustee company Railpen Investments, and the Universities Superannuation Scheme (USS). But Toshiaki Oguchi, representative director at GO Japan, expects more European institutional investors to join in the future.
“There are more institutions that own Japanese equities as either active or passive investors,” says Kodama. “In fact we are talking to institutional investors not only outside but also in Japan. As long-term investors they are likely to increase the portfolio value of their Japanese equities by improving the governance of the companies.”
“Japan is a very big and difficult market, meaning that investors find it hard to do the engagement themselves,” adds Oguchi. “That is why we have already seen plenty of interest from them in the consortium.”
The JEC’s target is to engage with 15-20 companies privately at any one time, supporting the management of companies to make the changes necessary to enhance long-term value. The factors on which an engagement might be conducted include financial performance, capital structures, communication and investor relations, and corporate governance.
But governance is not only becoming more critical for asset managers and investors - it is also crucial for companies themselves, as the Japanese environment is changing.
“The first big signal came from the Asian Corporate Governance Association (ACGA), which issued a white paper on corporate governance in Japan in May 2008,” says Oguchi. “This demonstrated how big a concern governance is for non-Japanese investors, who represent nearly 30% of total investors in Japanese companies. Since then, the two Japan ministries - METI (Ministry of Economy, Trade and Industry) and FSA - published their separate reports on corporate governance in June 2009, the Tokyo Stock Exchange unveiled a governance action plan and the new Japanese government, led by the Democratic party of Japan (DPJ), has stated that it wants to introduce governance in public law, including the tightening of parameters for selecting outside directors.”
Oguchi believes the JEC is crucial. “From a long-term perspective it is better for investors to work together, especially as Japanese companies come from a different culture than European ones,” he says. “When we engage with companies, we have to do so in a more conservative manner than European investors may be used to.”
As the initiative celebrates its first birthday, it is still too early to say whether company share prices have risen as a result of engagement, which only started in April.
“Unlike aggressive activist funds, we have a long-term approach and are aware that it takes time to materialise the effectiveness of our engagement approach,” says Kodama. “But if a company refuses to work with us or change its structure, we will have to give up on them eventually, although we believe this is unlikely. Japanese companies are competing head to head with other Asian companies, so I expect them to try to improve their governance in order to attract more investors.”
TMAM’s main goal behind its participation in the JEC venture is to ultimately launch a Tokyo-based Japanese Governance Fund, managed for international and Japanese institutional investors who are interested in the governance of Japanese companies.
“The JEC allows us to have an experimental period of engagement with European investors and Japanese companies,” says Kodama. “It is about proposing issues to companies, observing their reaction and negotiating on a non-hostile basis. This is particularly important because Japanese company managements are quite nervous about investments from overseas business partners. If this activity goes well, we plan to launch an engagement fund over the next two years. In other words, it is a kind of window-shopping opportunity for us.”
The fund would include underperforming companies that have room to improve their governance, and upon engagement are likely to be able to generate higher returns.