Japanese Investors Adopting New Stewardship Code (Principles for Responsible Institutional Investors)

Image by Tatsuki Akasaka Some Rights Reserved.

Japanese institutional investors such as pension funds and financial institutions were once seen as "silent shareholders" or "sleeping shareholders." Companies would have cross-holdings of share with other companies with which they did business, but these investors long supported the management of the companies in which they held investments (investees) without getting actively engaged, even when they were underperforming. This situation has started to change drastically.

Japanese Financial Service Agency (FSA) launched a Japanese version of "Stewardship Code" in February 2014, inviting institutional investors to sign up. Modeled on the British Stewardship Code adopted in 2010, these Principles for Responsible Institutional Investors were set out as a code of behavior for institutional investors who hold corporate stocks.

In Japan's stewardship code, "stewardship responsibility" is defined as the responsibility of institutional investors to enhance the medium- to long-term investment return for their clients and beneficiaries by improving the investee companies' corporate value and promoting sustainable growth through constructive engagement or purposeful dialogue based on in-depth understanding of the companies and their business environment.

The code defines seven principles considered to be helpful for institutional investors who behave as responsible institutional investors in fulfilling their stewardship responsibilities, with due regard both to clients/beneficiaries and to investee companies. The code states: "By fulfilling their stewardship responsibilities properly in line with this Code, institutional investors will also be able to contribute to the growth of the economy as a whole." Here is our summary of the seven principles in the code.

To promote sustainable growth of the investee company and enhance the medium- and long-term investment return of clients and beneficiaries, institutional investors should

1. formulate and disclose a policy to fulfill their stewardship responsibilities
2. formulate and disclose a policy on how they manage conflicts of interest
3. monitor investee's situations appropriately
4. understand in common with the investee and work to solve problems through constructive engagement with the investee
5. have a policy on voting and disclosure voting activity
6. report periodically on how they fulfill their stewardship responsibilities, including their voting responsibilities, to their clients and beneficiaries
7. have knowledge of the investee and their business environment, and consolidate skills and dialogue resources needed to make proper judgments in fulfilling their stewardship activities.

Although the code is not a law or legally binding regulation, the FSA expects to see progress in its implementation by compiling a list every three months of institutional investors who have announced that they have adopted the code. As of May 2014, three months after it was launched, 127 institutional investors had announced their intention to adopt it.
*The number of the investers increased to 160 as of August 2014.

The Government Pension Investment Fund (GPIF), managing about 130 trillion yen (about U.S.$1.29 trillion), is the biggest among them. Also, in the private sector, some major life insurance companies and trust banks have together indicated their acceptance of the code. In the past, many of the institutional investors depended on investment management companies for voting at the shareholder meetings of their investees and did not disclose their policies on voting. With the code principles, functions of monitoring investees' management will be strengthened, thanks to the code inducing institutional investors to create voting policies or make standards more rigorous.

Until now, Japan has not been known as a leader in socially responsible investment (SRI), in part due to the lack of proactive institutional investors. With this new code, perhaps "activist shareholders" can play a bigger role in supporting money flows that will create a sustainable society.

Written by Junko Edahiro