What Needs to be Added to the “Action Program for Accelerating Corporate Governance Reform: From Form to Substance”

Nicholas Benes
Representative Director, The Board Director Training Institute of Japan (BDTI)
(The following is my personal opinion and not that of any organization. This is a translation of the original article.)

As sent to prospective candidates to be the next Prime Minister, in no particular order:
Chief Cabinet Secretary Yoshimasa Hayashi, Minister for Foreign Affairs Yoko Kamikawa, Minister of Economy, Trade and Industry Ken Saito, Minister for Digital Transformation Taro Kono, Minister in Charge of Economic Security Sanae Takaichi, Secretary-General of the Liberal Democratic Party Toshimitsu Motegi, House of Representatives Member Shigeru Ishiba, House of Representatives Member Shinjiro Koizumi, House of Representatives Member Takayuki Kobayashi, House of Representatives Member Seiko Noda, House of Representatives Member Katsunobu Kato.

CC: Prime Minister Fumio Kishida, Deputy Chairman of the Liberal Democratic Party’s Political Research Committee Masahiko Shibayama, Parliamentary Vice-Minister of Health, Labor and Welfare of the Liberal Democratic Party Akihisa Shiozaki, Deputy Secretary-General of the Liberal Democratic Party Seiji Kihara, House of Representatives Member Kenji Nakanishi.

Japan’s Corporate Governance Code (CGC) and the investor Stewardship Code need to function as “two wheels” of a cart. I had advocated this since 2013, and when I had the opportunity to formally propose the establishment of the CGC to the Liberal Democratic Party in 2014[1], I insisted that the most important thing was to “promote the disclosure of information that enables one to verify governance structure and substance” at firms.

“Governance and oversight are more likely to function effectively on a board that has a majority of truly independent and qualified independent directors.” As of 2014, this dynamic had been recognized in many countries around the world. At the time, I thought that if companies disclosed their actual governance practices and stewardship by investors started functioning well, Japan, as a developed country, would naturally adopt a similar stance within the next five years or so.

Ten years later, however, there is still no serious discussion of these two issues in Japan. Now that global investors are paying more attention to the Japanese stock market, I believe it is time for us to confront these core issues and take the following steps to speed up Japan’s governance transformation.

Why Leaders Must Adapt To Evolving ESG Demands

By Helle Bank Jorgensen, CEO of Competent Boards

Earlier this year, I took part in a fascinating session with the World Economic Forum as part of the New Champion Dialogues 2022 series. Hosted by Olivier Schwab, Managing Director at WEF, I was joined by Anushka Bogdanov, Chair and founder of Risk Insights and Jason Jay, Senior Director at MIT Sloan School of Management. 

The discussion focused on the rapidly changing picture of environmental, social and governance (ESG) requirements for companies as they come under increasing pressure from stock markets to provide transparent, measurable and comparable data on their activities. 

And let’s not forget pressure from employees, suppliers, customers and other societal stakeholders. ESG risks and opportunities are a fast-moving field, with new regulations and expectations coming thick and fast. 

It starts and ends with the board of directors

For companies that want to effectively adapt to these evolving ESG requirements, including climate change, that process must start and end with the board of directors. ESG and climate change are areas where board directors cannot provide oversight if they don’t have the insight.

The Evolution of ESG Investment

“We are faced with a time of great change, as exemplified by the development of digital transformation (DX), changes in the socioeconomic structure, an increasing sense of crisis regarding global environmental issues, and changes in people’s mindsets. To seize these changes as an opportunity to achieve medium- to longterm economic growth and build a sustainable, human-centered society, the realization of “Society 5.0 for SDGs”—a concept originating in Japan—holds the key. Therefore, we conducted joint research toward the realization of Society 5.0 for SDGs with three parties representing the Japanese business community, academia, and investors, namely Keidanren, the University of Tokyo, and the GPIF. In the joint research, a series of discussions have been held with the shared recognition of the importance of stable medium- to long-term funding for companies, universities, and start-ups promoting problem-solving innovation for the realization of Society 5.0 for SDGs.

Accordingly, we have set an aim of realizing Society 5.0 and achieving SDGs by identifying the trend of now globally expanding ESG investment, further evolving it, and connecting it to the promotion of investment in problemsolving innovation. We then examined measures to achieve the aim. Specifically, we established four themes to promote investment in problem-solving innovation, and conducted research on specific initiatives of each player. At the end, through these discussions, we present a future action plan of the three parties for the realization of “Society 5.0 for SDGs.”

Example of UK Pension Voting Policy – Japan Still Has Far to Go

The London Borough of Camden Pension Fund recently updated its voting guidelines. I thought it might be interesting for Japanese readers to see how detailed such guidelines by foreign pension funds are.  It is interesting to note that if you applied these voting criteria to most Japanese companies, almost none of them would pass muster, and the result we would be that many resolutions (and many directors) would not be approved.  Japan is still far, far behind the level of “stewardship” and expected governance practices in many other countries.

London Borough of Camden Voting Guidelines 2020

Very few pension funds in Japan (none that I know of) have voting policies at anything near this level of detail.

 

Great Analysis of the Larry Fink/BlackRock Letter

“Today, after more than a year of increasing pressure from climate activists, investors, legislators, and thought leaders, BlackRock CEO Larry Fink, in his highly-anticipated annual letter to CEOs and to clients, announced a sweeping new set of policies which aim to put climate change and sustainability at the center of BlackRock’s business model. BlackRock is the world’s largest asset manager with almost $7 trillion in assets under management as of Q3 2019. …..The announcement is a major shift for BlackRock, which previously had failed to take meaningful action on climate, and is a very important step in the right direction as the world faces increasing risk from climate change. Massive capital shifts away from fossil fuels and deforestation-risk commodities are necessary to mitigate the worst of the climate crisis and set the world on a path toward sustainability.

Nicholas Benes: Public Comment on Revision of the Stewardship Code

1) Pension Funds
2) Other Types of Investors
3) “ESG Factors”
4) Debt Instruments

1) Pension Funds

The proposed revisions to the Stewardship Code do not make it clear enough exactly how corporate pension funds, or smaller pension funds of any type, can sign the Code and comply with it without bearing excessive cost, work, or confusion.  Because this is not sufficiently clear at present, to date only an extremely small number of the defined-benefit pension funds at listed non-financial companies in Japan have signed the Code (only about 10, out of a total of 700 or more such funds). As a result, a rather odd situation exists in that most Japanese companies claim to care for their employees deeply, but judging from their actions, do not seem to care much about employees’ investments or post-retirement quality of life – or even, to care about preserving shareholder value by reducing the cash infusions needed to keep their pension plan fully funded. This makes a mockery of the language in the Corporate Governance Code about stewardship (Principle 2.6 企業年金のアセットオーナーとしての機能発揮), and of the Stewardship Code itself.

TIIP:”Sustainable Investing in Japan: An Agenda for Action”

Executive Summary

More than a quarter of assets under management (AUM) worldwide are invested in “sustainable” strategies, strategies that consider environmental, social, and governance (ESG) factors in pursuit of financial sustainability and/or environmental or social sustainability. Investors – both individual and institutional and at all wealth levels – are increasingly interested in integrating these strategies into their financial plans and investment portfolios, and asset managers and global financial institutions are embracing the approach and expanding related services and product offerings.

Interest in sustainable investing and sustainably invested AUM are growing rapidly in Japan. But despite this enthusiasm and growth, few mainstream investors, financial advisors, and investment consultants in Japan are embracing the practice.

Corporate Governance in Japan: What Has Changed in the Past Three Years?

I recently gave a presentation in which I tried to answer this question. Here are the top-line conclusions:

  • Investors are finding their voting voices
  • Now they need to find to find their asking voices
  • There is a way to tear down the “allegiant shareholder ” wall
  • Factors that correlate with superior performance include: >= independent directors, low “allegiant” holdings, >15% female directors, and age of firm <45 years
  • Activism is becoming more effective

These conclusions are based on a huge amount of time-series data we have collected. We are now building a comprehensive time-series database that includes not only financial data, but all text and numerical data from financial reports and CG Reports, as well as tabulated AGM voting results for each resolution. The data will be organized so that one can zero in on exactly the data one needs. Here is a simple example showing board practices parameters, historical AGM participation and CEO approval rates, and the trend of ownership of “allegiant shareholdings”:

Japan’s Corporate Governance Conundrum, and How Investors Can Solve it

Out of more than 700 defined-benefit corporate pension plans in Japan, only five non-financial corporate pension plans have signed the SC. Second, a major portion of Japan’s asset owners are the companies themselves, in the form of direct “policy holdings” of the shares issued by other companies. Japan’s dual walls of “conflicted pension governance” and “allegiant shareholders” need to be torn down. Here is how it can be done.