Better corporate governance in Japan seen luring long-term funds
SHUICHI MARUYAMA, Nikkei staff writer
TOKYO -- Corporate governance in Japan has the potential to leap forward on two fronts this year, lifting hopes among stock market players that this will lead to higher corporate value and attract long-term investors.
The Tokyo market was inactive Friday, with trading of both cash stocks and futures at year-to-date lows. The inflow of money has slowed with the economic outlook and monetary policies of Japan and the U.S. becoming harder to read. As a result, investors are shifting their attention to two reforms meant to shore up corporate governance: the requirement that corporations have outside directors and the establishment of a code of conduct for institutional investors.
At Canon's general shareholders meeting on March 28, Chairman and Chief Executive Officer Fujio Mitarai was re-elected to the board of directors with 90% in favor, up from 72% a year earlier. Foreign investors that voted against him last year did an about-face due to Mitarai's proposal to introduce outside directors. According to Takeyuki Ishida at proxy adviser Institutional Shareholder Services, the improved corporate governance led to restored confidence.
Nippon Steel & Sumitomo Metal and Kagome are among companies that will begin naming outside directors this year. Under a legislative revision, corporations without outside directors will have to provide a rationale at their shareholders meetings. Experts predict that all Japanese companies will soon have outside directors.
The main role of outside directors has been to monitor businesses to ensure compliance with the law. But recently, they have been encouraging companies to engage in businesses aimed at realizing returns sought by investors, according to the Japan Corporate Governance Network.
These expectations are reflected in stock prices. In the January-March quarter, 51% of Nikkei components with outside directors -- including those with plans to bring them on board -- outperformed the benchmark index, compared with 45% among those without. The divergence is expected to only grow over a longer period.
Douglas Butcher at BNP Paribas argues that foreigners, especially long-term investors, tend to favor companies with appropriate corporate governance. At Hoya, where outside directors have made up the majority of the board since 2003, the percentage of foreign shareholders grew from 38% as of March 31, 2003, to a record 58% as of Sept. 30 of last year.
The other major reform taking place is the implementation of the Japanese version of Britain's Stewardship Code, which encourages asset management companies, insurers and other institutional investors to discuss ways to improve long-term value with their investment targets. An expert panel under the Welfare Ministry has called on the Government Pension Investment Fund, the manager of Japan's public pension assets and among the biggest institutional investors in the world, to adopt the code.
Although no Japanese companies have indicated plans to adopt the Stewardship Code so far, a move by the GPIF to do so would likely lead other investment companies to follow suit. This could mean that domestic institutional investors, and not just foreigners, will become a stronger force that can help prop up Japanese stocks.