ACCJ Viewpoint: “The GPIF and its Asset Managers Should Support Japan’s Corporate Governance Code”

From the just-issued Viewpoint:  The American Chamber of Commerce in Japan (ACCJ) applauds the Government of Japan (GOJ) for the implementation of the Stewardship Code for institutional investors and the Corporate Governance Code (the “Governance Code”) during the past year. However, the effectiveness of the new codes and the ability of Japanese public and corporate pensions to meet their pension liabilities may be undermined if the Government Pension Investment Fund (GPIF), Japan’s national pension fund and the largest pension fund in the world, does not actively fulfill its role under the Stewardship Code. The most important way it can do this is by requiring its active asset managers to understand and factor into their investment activities the principles of Japan’s own Governance Code.

The ACCJ recommends that the GPIF complement the GOJ’s policies to improve corporate governance and “stewardship” by institutional investors in Japan by amending its Investment Principles and the accompanying clarification thereof so as to clarify that the GPIF requires its active asset managers of Japanese equities to apply the Governance Code’s principles in conducting their investment activities. This should be done by inserting words such as the following in the section on “Stewardship” in the GPIF’s Investment Principles Description (additions underlined and in bold):

The GPIF Law stipulates that we should outsource investments in equities through external asset managers, to whom we entrust exercise of voting rights. In entrusting to active managers of Japanese equities, we require them to recognize the importance of corporate governance, to become wellversed in the Corporate Governance Code, to factor the Code’s principles into their analysis and other investment activities including proxy voting, to pledge that the purpose of proxy voting is to maximize the long-term interests of shareholders, and to report on their policies and the results of proxy voting.

Without these additional words, the GPIF is currently asking its active asset managers to merely “recognize the importance of corporate governance”, with no reference to Japan’s Governance Code.

This change to GPIF’s stated policy is essential in order to: a) maximize the GPIF’s ability to meet its future obligations to pay pension liabilities, thereby protecting the interests of the workers who are its beneficiaries; b) protect the interests of Japanese taxpayers who may need to fund any shortfalls; c) ensure that the GOJ’s own policies encouraging corporate governance reform are as effective in maximizing investment values and growth as is hoped; d) set a good example of modern pension fund management and stewardship for other pension funds in Japan, many of which tend to follow the GPIF’s practices; and e) generally ensure that the Stewardship Code has its intended positive impact….

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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