Yoshihiro Tanaka of Asuka Corporate Advisory and
Yosuke Mitsusada of Asuka Asset Management outline the symptoms
of equity governance changes taking place in
The Japanese finance industry is now entering into an era of
equity governance. We believe a good cycle of corporate
governance movement in Japan, boosted by a series of
governmental stimulus packages, will change the mindset of
Japanese companies and investment community. Japan's
Stewardship Code (JSSC), adopted in 2014, and the Corporate
Governance Code (JCGC), scheduled in 2015, will promote
dialogues between the companies and investors and improve the
quality of the Japanese business community. The positive cycle
of engagement investment and the improvement of equity
performance are about to be set in motion.
implementation speed of these programmes has been
The relationship between Japanese investors and listed
corporations is facing changes, due to increasing interest in
corporate governance movements. The Japanese business community
is at the cusp of an equity governance era, which the Japanese
equity market will benefit from.
The Japanese equity market has been in a downward trend for
over 20 years. Aside from the influence of prolonged deflation
and appreciation of the yen, this can be attributed to several
factors, such as cross-shareholdings, low capital efficiency of
listed corporations (from the corporations' point of view), a
bias on index-linked equity investment styles, and the
so-called short-termism (from investors' point of view). On the
other hand, the enhancement of investment returns for pension
assets is seen as an urgent issue for Japanese society, which
has an ageing population. The reform of the equity market is
therefore high on Japan's agenda.
|Chart I: good cycle of
As Chart I demonstrates, a good cycle of corporate
governance movement in Japan is brought about by changing the
asset owners of pension assets, asset managers and
corporations. This will encourage the improvement of equity
performance and lead to a continuous improvement in the quality
of the Japanese business community.
There have been a series of stimulus packages, which include
reforms in corporate law, the tax system and a revitalisation
programme for the equity market since the announcement of the
Japan Revitalisation Strategy (JRS) by the Japanese Government
in June 2013. The JRS has given birth to the Japan's
Stewardship Code (JSSC) in 2014 on the investor side and the
Corporate Governance Code (JCGC) scheduled in 2015 on the
listed side. Considering that government policy generally takes
time to be implemented in real business, the implementation
speed of these programmes has been exceptional. The Japanese
business community, which has a strong culture of obedience to
governmental regulation in general, has taken this
Asset owner changes
The Government Pension Investment Fund (GPIF), the world's
largest public pension fund, with approximately $1.27 trillion
in assets under management and an opinion leader among Japanese
asset owners, has shown signs of change.
The social pressure to improve the investment return of
Japanese public pension funds, which is relatively low compared
to the world standard, is growing. Consequently, the GPIF
decided to increase exposure of Japanese equity in their assets
up to 25% from 12% in October 2014. In reforming from a
bureaucratic organisation, the GPIF is discussing further
organisational changes, including the investment decision
process and the recruitment of investment professionals outside
The GPIF accepted the JSSC before other pension funds, and
introduced an engagement funds category as an independent asset
class. The transition toward proactive risk taking and creative
manager selection is becoming more distinctive. Such attitudes
are expected to spread over other mid- to small-sized pension
funds, including public and private ones.
Asset manager changes
As Chart II shows, 109 asset managers, including investment
trust managers and investment management advisory companies,
accepted the JSSC at the end of August 2014. The number seems
small compared to 735, the total number of asset managers who
are registered with the Japan Investment Advisers Association.
However, considering that the registered number of investment
advisors for the first year of the UK Stewardship Code (UKSSC)
was only 48, which quadrupled in three years, this number has
the potential for future increase and can be assessed as
penetrating ahead of schedule.
II: the number of insitutions accepted ukssc
UEDA(2013), FRC and Asuka Corporate Advisory)
number of institutions accepted jssc (August, 2014)
||Change in #
|Investment Trust &
Investment Management Advisory
FSA and Asuka Corporate Advisory)
|Chart III: the differences in
purposes of setting ssc/cgc by countries
Compared with the UKSSC, which was introduced due to an
increase in investment risks triggered by a series of corporate
scandals, the JSSC can be seen as a component of the stimulus
package to accelerate growth of the Japanese economy by
enhancing the capital efficiency of Japanese corporations.
Therefore, the concept of 'improving and fostering the investee
corporations' corporate value and sustainable growth' is
imposed on Japanese financial institutions in the JSSC, in
addition to the 'improvement of long-term risk-adjusted returns
to shareholders', as per the UKSSC.
The acceptance of the code by life and property and casualty
insurance corporations will also have a positive effect on the
market. Despite criticism that they are so-called silent major
shareholders, 21 out of 77 insurance corporations accepted the
codes. They have started not only to disclose the results of
their voting, but have announced that they will start dialogues
with investee corporations.
Listed corporation changes
As of November 2014, the Financial Services Authority (FSA)
and the Tokyo Stock Exchange (TSE) are in the final drawing-up
process of the JCGC. This targets the implementation of the
Code into the shareholders' meeting of listed corporations
effective in June 2015. The introduction of core concepts in
the JCGC, such as independent outside directors, improvement of
capital efficiency, liquidation of cross share holdings and
constructive dialogue with shareholders under the JSSC, are
expected from the market participants.
toward proactive risk taking and creative manager
selection is becoming more distinctive"
Ahead of the implementation of the JCGC, some symbolic
changes have already been observed among listed corporations.
The penetration of outside directors among TSE I listed
corporations reached 74.3% in 2014 compared to 62.3% in 2013.
As for TOPIX100 corporations' cases, which represent the
attitudes of the largest Japanese corporations, the number was
even higher, reaching 92% compared to 89% last year. This trend
is expected to further accelerate, as the Institutional
Shareholders Service has announced a new policy on director
elections in Japan that targets top executives of corporations
that have failed to achieve an average return on equity (ROE)
of at least five percent over the previous five years.
Corporate governance movements under the influence of
shareholders seems to have been spreading among large,
conservative mainstream corporations. Such corporations, for
instance members of the Federation of Economic Organisations,
used to be more passive in accepting changes. For example,
Canon, Nippon Steel & Sumitomo Metal and Toray Industries,
have adopted outside directors. Further, business consolidation
undertaken between Mitsubishi Heavy Industries and Hitachi, and
the rejection of anti-takeover measures in the shareholders'
meeting of Capcom are symbolic cases showing the penetration of
corporate governance consciousness in the Japanese business
community. We have been involved in dialogues with the investee
corporations since 2005, as an investment manager and an
advisor for engagement fund specializing in the investment of
small to mid-sized corporations there is a definitive change in
the mentality of those managing these corporations: the winds
of change are beginning to blow on Japan.
|Chart IV: distribution of
companies under roe 8.0% by market cap (n=2009)
|Chart V: Japan's stewardship
code: distribution of acceptance
VI: PBR breakdown (5 year average)
|MSCI Japan Small
|MSCI Asia ex Japan
Bloomberg, Asuka Corporate Advisory)
Japanese Stock Market changes
Despite expectations from changes to asset owners, asset
managers and listed corporations, the performance of the
Japanese Equity market has been less attractive in 2014,
compared to the US and other Asian markets, though slightly
more positive than European markets. However, the Japanese
governance reforms are still in their infancy; the coming year
will no doubt see changes in the Japanese corporate community
affecting the performance of the equity market in the long
Though small, the changes mark significant steps for
Japanese asset owners, asset managers and listed corporations.
It is important that the early adopters of these changes are
the leading institutions or corporations in their industries,
so that the changes will spread down to the bottom.
The number of corporations whose ROE fails to reach eight
percent accounts for 53% (3,767) of all the listed corporations
in Japan. Eight percent is the figure that the Ito
Review, a project backed by the Ministry of Economy, Trade
and Industry, set as a tentative target for listed
corporations. The small- to mid-sized corporations whose market
capitalisation is less than $500 million account for 75.9%.
Those small- to mid-sized corporations are sitting on world
quality products and local or outdated management; from a
corporate governance and modern corporate management point of
view, they are dormant Japanese corporations that tend to
prefer homogeneity and are based on a so-called culture of
shame compared with western corporations, will be affected by
the changes occurring in large corporations. In other words,
the sweet spots in corporate governance reform are those small-
to mid-sized corporations that are lying dormant. A change is
on the horizon.
"Ahead of the
implementation of the JCGC, some symbolic changes have
already been observed among listed corporations"
In order to clarify the effect of dialogues between
financial institutions and corporations on the equity market,
Chart V shows an analysis on the engagement styles of financial
institutions who accepted Japan's Stewardship Code. As of the
end of August 2014, 160 institutions who accepted the JSSC have
been categorised based on the scope of acceptance and the
concreteness of engagement activities.
Chart V shows that, although large numbers of financial
institutions accepted the full range of the JSSC, the
concreteness of their activities is generally vague.
Consequently, the main focus of the dialogue between
institutional investors and listed corporations for the time
being is expected to be the improvement of capital efficiency
Representative Director, COO
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Asuka Corporate Advisory
Chief Fund Manager
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Asuka Asset Management
Though these engagement approaches may seems to be
entry-level, they are a fit for the majority of financial
institutions who are still seeking the best engagement methods
for themselves, and a fit for the majority of dormant Japanese
corporations, as they are simple and clear targets. It will
urge them to take business risks actively. The combination of
ROE targets and voting works powerfully to improve the lower
end of the Japanese equity market.
It is well known that the Japanese corporations'
price-to-book-value ratio (PBR) are relatively low compared to
their global peers. However, as is clear from the breakdown
analysis of PBR, the low evaluation of Japanese corporations'
assets does not come from the price-to-earnings ratio (PER),
but from low capital efficiency (ROE). If Japanese corporations
and investors could improve ROE successfully to 10 to 15%
(which is the global average) the potential of the Japanese
market is huge.
Welcoming in a new era
Having gone through the era of debt governance before the
1990s, the Japanese finance industry is now entering into an
era of equity governance; the management agenda will change
into capital efficiency and profitability from sales driven
management. The positive cycle of engagement investment, as
shown in Chart I, is about to be set in motion.