In an environment where the structure of company boards is under greater scrutiny than ever, major fund investors are also coming under pressure to engage and exert their influence over companies they are invested in. The organisation Governance for Owners has done a lot of work in Asia developing this concept, not least in Japan. Their latest initiative, in association with Tokio Marine Asset Management (TMAM) and long-standing UK ally Railpen, is the launch of a Japan Engagement Consortium (JEC). The intention is to bring together responsible Japanese and international institutional shareholders on whose behalf the Consortium executives will engage with Japanese companies to improve long term shareholder returns. . TMAM is the 4th largest discretionary investment advisory firm in Japan. Yoichiro Iwama, Chief Executive of TMAM, says, “Japanese public companies are facing a changed market environment. There are opportunities for those which adapt rather than build defences.”
The Consortium stresses that engagements will be conducted in a way that is appropriate to the Japanese market. The Consortium will conduct its engagements in private, supporting management of companies to make the changes necessary to enhance long term value. At any one time, it is expected that the Consortium executives will be engaging with 15 to 20 companies on behalf of the Consortium members. The types of performance factors on which an engagement might be conducted include financial performance, capital structures, communication and investor relations, and corporate governance.
Peter Butler, Chief Executive of GO, said “This is a new approach to responsible share ownership in Japan. Collective engagement by a group of institutions is advantageous as it pools resources efficiently and enables those investors without in-house expertise on Japanese corporate governance matters to conduct a high quality dialogue with portfolio companies. Japan is at a turning point and we see that as a positive development for long-term share owners in Japan.”
Railpen Investments oversees assets worth approximately £20 billion on behalf of the Railways Pension Trustee Company. Its Chief Executive Chris Hitchen says, “Japan is an important market for us. In the last year we have worked with Governance for Owners to organise over 100 face to face meetings with Japanese companies in which we invest and we see the consortium as a logical extension of our efforts to be responsible shareowners.”
The Consortium will be operated by GO Japan KK, in which TMAM has recently acquired a 40% interest and board representation. It will be staffed by investment, governance and engagement specialists with expertise in the Japanese public equity market.
Japan’s intellectual struggle with governance is well documented. Goldman’s Kathy Matsui notes that while some progress has been made on voting, Japan needs more domestic support of governance, rather than relying on foreign activist investors. Yasunori Nagai, executive advisor to the $1.3trn Government Pension Investment Fund of Japan, is perfectly happy to declare that the GPIF does not address any issues of a social contract. It’s often the fear of losing control and a fear of failure that prevents action. Ambassador Linda Tsao Yang, who sits on the board of Bank of China, with six independent directors, can be relied upon to strongly disagree with any Japanese senior executive who dares to suggest that ‘that is not the way we do things here’. Her view is that the make up of company boards requires a broad mix of experience “that is relevant to the modern world; fearless individuals of high reputation who will dare to speak up”.