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Japan: Stewardship Code amendments

First published by the Council of Experts on the Stewardship Code in February 2014, the Principles for Responsible Institutional Investors – Japan's Stewardship Code experienced its first amendment on May 29 2017.

The Code was originally introduced using examples from the UK Stewardship Code. It aims to promote sustainable growth of the investee company and enhance the medium- to long-term investment returns for the investors' clients and beneficiaries through constructive engagement, or purposeful dialogue, between institutional investors and companies. Technically, the Code is not a law or a legally binding regulation, and adopts the 'comply or explain' approach (in other words, comply with the principles or explain why they are not complied with).

In general, the Code defines seven principles – institutional investors should (i) establish and disclose a policy on fulfillment of stewardship responsibilities; (ii) establish and disclose a policy on managing conflicts of interest; (iii) monitor investee companies; (iv) seek to arrive at an understanding in common with investee companies and work to solve problems through constructive engagement with the companies; (v) establish a policy on voting and disclosure of voting activities; (vi) report periodically on fulfillment of stewardship responsibilities to their clients and beneficiaries; and, (vii) have in-depth knowledge of the investee companies and their business environment, and the skills and resources needed to appropriately engage with the companies and make proper judgements in fulfilling their stewardship activities. Even after the amendment of the Code, finalised in May 2017, these seven principles remain the same.

One of the key changes that occurred in May 2017 was the disclosure of the results of voting. Revised guidance under principle (v) states that in order to enhance visibility of the consistency of their voting activities with their stewardship policy, institutional investors should disclose voting records for each investee company on an individual agenda item basis. Actually, some major institutional investors have already started to disclose such voting records for shareholders' meetings held this year. This change may have an impact on institutional investors' attitudes toward exercising voting rights. Another noteworthy change is the expansion of the scope of the Code in respect of management resources, quality control and disclosures applicable to proxy advisors, which some experts deem to have had considerable influence recently on the corporate governance of Japanese companies through their voting recommendations. The set of amendments also includes, among other things, enhancement of the stewardship responsibilities of investors as asset owners (including providers of funds) as well as asset managers and the introduction of the concept of collective engagement with other investors.

Tatsuya Hasegawa

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