Japan investors to use UK-style code
Investors in Japan will soon be bound by the country’s first code of conduct covering engagement with companies, which should encourage shareholders to challenge executives on thorny matters such as low dividend payouts and a lack of independent directors. From May, any investor owning or managing Japanese stocks will be expected to follow a new seven-point code. The framework borrows heavily from the UK’s Stewardship Code, which was drawn up in 2010 with the aim of stopping directors sanctioning the deals and excessive pay awards that were blamed for fuelling the financial crisis and which has served as a template for similar codes in Canada, South Africa and the Netherlands. Adherence to the new Japanese code – which, as in the UK, will be run on a "comply or explain" basis – should "spur collaboration among domestic investors regarding shareholders’ common interests", said Naoki Kamiyama, chief equity strategist at Bank of America Merrill Lynch in Tokyo. The effort is part of a broad sweep of measures under the so-called third arrow of the government’s ambitious growth programme, which aims to improve the country’s long-term competitiveness through a series of reforms. Related initiatives include an overhaul of the public pension system – under which giant institutions such as the Government Pension Investment Fund have been directed to manage their bond-heavy portfolios more aggressively – and the launch of a new stock index designed to squeeze out unprofitable companies with weak standards of corporate governance. The overarching aim is to haul investors out of the deflationary mindset in which it was "rational" to hold cash and bonds and to accept feeble returns from equities, said Tomoyuki Furusawa, director of the policy and legal division at the FSA. Excitement over the programme, which also includes radical monetary and fiscal stimulus, has drawn a record $142bn of foreign investment into Japanese stocks this year, helping the benchmark Nikkei 225 stock average beat every other developed market this year in local currency terms. "We are trying to jump from one equilibrium to another, so the whole financial system needs to prepare," said Mr Furusawa. The first draft of the new Japanese code – published for comments by the FSA on Thursday – differs from the UK code in a couple of respects. Principle five of the UK code, requiring investors to be willing to take part in collective actions "where appropriate", is likely to be replaced in Japan by a milder principle requiring investors to engage with each company based on a "deep understanding", exchanging views with other investors if necessary. There is also no definition of the "major items" on which investors will be expected to disclose the way they voted. Still, Toshiaki Oguchi, executive director of Go Japan, an activist group, and one of 13 members on the FSA’s advisory council, said the Japanese version was remarkable because it started from the assumption that stronger corporate governance could lead to a more vigorous economy. For Japan, where many companies routinely put the interests of shareholders behind those of lenders, customers and suppliers, this is a big departure, he added. "Japan has a history of recognising activists as ‘bad guys’. But constructive engagement is a good thing, for both investors and companies and society as a whole. This is a positive change of mind."