Stewardship, voting and corporate scandal: Governance in Japan

The introduction of both a Stewardship Code in 2014 and a Corporate Governance Code a year later in Japan has pushed investors to focus more on the governance standards of the companies they’re invested in and forced companies to make changes – particularly when it comes to appointing independent directors to the board. 

But accusations of box-ticking remain and Shigeo Imakiire, president of Investor Communications Japan, a joint venture of Broadridge and Tokyo Stock Exchange (TSE), says that while progress has been made, there’s more that Japanese companies could be doing. 

In what ways have you seen corporate governance change in Japan in recent years?

Both the Corporate Governance Code and the Stewardship Code require listed companies and institutional investors to engage in constructive dialogue to improve shareholder value. This dialogue between companies and investors has been promoted and expanded in recent years, with the proportion of listed companies appointing two or more independent directors increasing from 48.4 percent in 2015 to 91.3 percent in 2018.  

More than three quarters (77.3 percent) of listed companies now disclose meeting materials on their own website or that of an exchange prior to the physical mailing of the documents, and 40.3 percent disclose proxy materials in English. The environment around corporate governance and proxy voting has dramatically improved recently.

In addition to making the changes investors want around governance, are Japanese companies doing enough to communicate these changes? What could they be doing more of or better on the communications side?

Led by the government initiatives, the alignment of business plans with the UN’s Sustainable Development Goals (SDGs) has been attracting the attention of Japanese companies, and many now disclose their efforts and contributions around SDGs in proxy materials and/or ESG reports. Overseas investors often request greater disclosure in English, however.

A number of institutions have recently said they will vote against companies not meeting the requirements on independent directors. What is the significance of this?    

The Stewardship Code requires institutional investors to carefully consider and exercise voting rights as an important engagement activity. Institutional investors also need to disclose voting results on each agenda item since the revision of the Stewardship Code in 2017. The Financial Services Agency’s guidelines for dialogue between investors and companies stipulate that engagement should cover the appointment and performance of independent outside board members.

As a result of the more stringent requirements for corporate governance, the number of institutional investors that vote against has been increasing. For example, as of July 2018, the number of companies with a ‘for’ vote ratio for the appointment of outside directors of less than 70 percent was up 2 percentage points from the previous year to 6 percent. 

Aside from the issue of independent directors, what were some of the top issues on the agenda for the 2019 proxy season?

The agenda to introduce restricted stock-type compensation has been increasing. This trend stems from the recognition that management compensation should be more linked to the fluctuation of corporate value.

We have also observed an increase in support for shareholder proposals from institutions, while the handling of corporate scandals is another issue. Proxy advisory firms and Japanese institutional investors have voted against companies [in a number of cases] depending on the impact on corporate values. Institutions are paying attention to measures to tackle such issues and to prevent them from recurring.