by Mr. Yoshikazu Maeda, Head of Responsible Investment, Governance for Owners Japan
Year 2012 when Mr Abe became the Prime Minister was the tipping point for Japanese corporates. Japan has been through drastic changes since then. Under the Abe administration, an approach to corporate governance reforms was changed to be more comprehensive and principle-based than before. The government introduced the Stewardship Code in February 2014, published Ito Report (“Japanese Kay Review”) in August 2014 and the Corporate Governance Code in June 2015. The Stewardship Code was then revised in May 2017 to further promote investor stewardship.
This series of policy measures had significant impacts on Japanese corporates and investors. For example, 45% of companies listed on the 1st Section of Tokyo Stock Exchange had no outside directors on their boards in 2012. Currently, nearly all companies in the section have adopted outside representation on their boards and on average around 30% of the board members are outsiders. Another example is that the number of companies removing poison pills each year is increasing. There are clear signs that companies are responding to investors’ engagement and the Corporate Governance Code. In the meantime, investors are stepping up stewardship activities in response to the Stewardship Code. More than 200 institutional investors have now signed up for the code.
Then, all good? Not really.
In our view, Japanese corporates face challenges from a sustainability perspective. Diversity and human capital are two biggest challenges that Japanese companies face from a perspective of sustainable growth. More diverse and independent boards should be able to make more sound and transparent business judgements and a more diverse group of employees should be able to generate more creative business ideas to cope with a continuously changing business environment. It is also important to ensure that the more diverse organisational structures put into place function effectively. The competitiveness of a company depends more and more on ‘soft’ knowledge rather than on how much the company can spend on physical capital. Human capital has never been more important to corporate value. Business knowledge, know-how, skills, and customer relations need to be passed down from one generation to the next.
Business ethics and culture is another aspect that we are worried about. Whereas business ethics is an integral part of sound corporate activities and crucial for the sustainable growth of a company it is intangible and difficult to measure and to quantify. However, recent months witnessed a series of scandals at Japanese corporates, starting with Nissan and Kobe Steel and most recently at Toray. It is a good thing for these scandals to be revealed now and it might be partly because recent governance reforms encourage whistleblowing mechanism and because it actually started working. However, it clearly poses a challenge to Japanese corporates. By witnessing these scandals, investors may urge Japanese companies to adopt an independent audit committee. We believe that it is one of the effective countermeasures. On the other hand, preventive mechanisms can also be evaded by motivated individuals. Business ethics and culture serve as the ultimate safeguard against corporate scandals.
Ministry of Economy, Trade and Industry published “Guidance for Collaborative Value Creation” on 29th May 2017. The guidance regards sound corporate culture as the foundation of corporate and its sustainability. This may be self-evident however it often is the case that a corporate puts a higher priority on a short-term financial outcome, compromising more intangible but important values.
That is where GO Japan and GES come in and started Japanese Stewardship Engagement. Here, we are trying to engage with large Japanese companies and to investigate into sustainability issues which we believe are important for companies’ sustainable growth and it includes, if not limited to, a corporate culture.