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US investors have mixed feelings about Japan's corporate governance

TOKYO -- The headquarters of the Council of Institutional Investors in Washington is preparing for a conference on corporate governance in late September. The situation in Japan will be on the agenda.

     When the council held a conference back in April, it invited Hiroshi Komori, associate general manager of Sumitomo Mitsui Trust Bank. He was the first Japanese panelist in the council's 30-year history. Many members of the business lobby, including public pension funds and foundations, are buying more Japanese stocks and are interested in corporate governance reform in Japan, according to CII Interim Executive Director Amy Borrus.

U.S. fund manager GMO's Thomas Rodes urges companies to focus on improving ROE.

     The council has a huge influence, as the combined asset managed by the members exceeds $3 trillion. It sent a letter to Japanese Prime Minister Shinzo Abe last year, proposing that outside directors should account for more than two-thirds of the directors and that boards of directors should be made up of no more than 15 people. The council believes that speeding up corporate governance reforms will help improve shareholder value.

     The government and the business sector have teamed up to introduce stronger outside control to help improve return on equity. Their effort has drawn attention from overseas investors to Japanese stocks, but not everyone is unreservedly happy.

     Thomas Rodes, a portfolio manager at GMO that manages assets worth $117 billion, is skeptical that Japanese corporate executives' mindset has changed. He met officials from more than 50 Japanese companies who visited GMO between July and August for investor relations activities. A growing number of companies are aiming to improve their ROE, but when he asked how they are going to achieve it, they seemed to rely on higher revenues as before. Few mentioned withdrawing from unprofitable projects and other drastic proposals.

     Overseas investors still have deep doubts about Japanese corporate governance because of cross-shareholding, countermeasures against buyouts and a wave of accounting scandals.

     Amid this skepticism, U.S. long-term investors rely on Japanese stock funds managed by activist investors.

     When the Nikkei Stock Average plunged on the Tokyo Stock Exchange on Sept. 1, Alexander Roepers, Atlantic Investment Management founder and president, felt assured because affluent clients bought Japanese stock funds as scheduled.

     Atlantic is known as a "gentle" activist fund that maintains dialogue with corporate leaders to persuade them to improve their management. Their style is different from more vocal activists who try to have their requests accepted through shareholder proposals or proxy fights.

     U.S. long-term investors have high hopes that such activist funds can encourage Japanese companies to reform their governance. Disruptive tactics taken by U.S. fund manager Steel Partners met resistance, but some soft activists have achieved success through patient dialogue.

     Ichigo Asset Management is a leading gentle activist. The size of its Japanese stock funds has almost doubled to nearly 550 billion yen ($4.52 billion) over the past year, prompting the company to halt accepting new investors for those funds. Existing investors include European and U.S. university funds and foundations.

     Corporate governance reforms have succeeded in attracting U.S. investment money, but expectations will quickly turn into disappointment unless reforms are fully implemented. Investors are closely monitoring which companies can live up to their expectations.


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