TOKYO -- Japanese and overseas institutional investors are increasingly embracing a set of guidelines -- known as the Japan Stewardship Code -- aimed at encouraging dialogue between institutional investors and management. The rules were drawn up by Japan's financial watchdog and spell out the responsibilities of investors.
Nearly 120 institutional investors, including Japan's Government Pension Investment Fund (GPIF), announced their decisions to adopt the Japanese version of the U.K. Stewardship Code as of the end of May, people close to the matter told The Nikkei. These investors likely have assets under management totaling at least in the hundreds of trillions of yen, or trillions of dollars.
The Stewardship Code is a code of conduct for big investors introduced in the U.K. in 2010. It is designed to help investors reap profits as well as promote overall economic development by supporting the long-term growth of companies targeted for investment. The code is based on the notion that investors should play an active role in this process.
In Japan, the Financial Services Agency crafted its own version of the seven-pronged code in late February. The guidelines, which are not legally binding, call for investors to have a better understanding of and communication with the management of target companies. The code also includes the creation of voting-rights policy.
As part of Prime Minister Shinzo Abe's growth strategy, his government has been promoting the stewardship code. It sees the guidelines as a way to better reflect the opinions of institutional and other investors in corporate management and strengthen corporate governance. The government believes the code will encourage companies to funnel some of their huge reserves of cash toward capital spending. Such outlays, the government believes, would lead to higher dividend payouts and a more vigorous stock market, eventually benefiting individual investors as well.
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The GPIF manages about 130 trillion yen ($1.25 trillion) worth of funds, making it the largest institutional investor to adopt the code. One change it is already planning is to boost its ratio of investment in stocks.
Until now, the fund has left it up to asset management companies to decide whether the GPIF should exercise its voting rights at the shareholders meetings of target companies. But it will compile a set of policies on its voting rights and enhance its monitoring of the management of such businesses. The fund's call for management reform could improve corporate profits, leading to higher stock prices and better investment returns.
Similarly, major private life insurers and trust banks, including Nippon Life Insurance and Sumitomo Mitsui Trust Bank, have announced their decisions to adopt the code and will formulate policies in line with it by summer.
Some overseas investors have also decided to embrace the code. In 2013, such investors bought roughly 15 trillion yen worth of Japanese stocks on a net basis.
Japanese institutional investors have often been described as "silent investors" due to their reluctance to step in when earnings slide at companies in which they invest. This reluctance stems from the fact that many of their Japanese investment targets are linked by cross-shareholding agreements. Because of these ties, rocking the boat at one company might create ripple effects that spread to other investment targets.
The government hopes the new code will put an end to this phenomenon and provide what it sees as a much-needed jolt to the Japanese business community.