How far has Japan's corporate governance reform progressed under Abenomics and what steps do financial authorities plan to take next?

IJ talked with Toshitake Inoue, Director of the Corporate Accounting and Disclosure Division at Financial Services Agency (FSA) about these topics. Inoue, the director in charge of the Stewardship and Corporate Governance codes, stressed the ongoing need for more effective action in business practices and investment, and more disclosure in English to foreign investors.

Investment
Japan (IJ):

The two codes you oversee were introduced as tools in corporate governance reform, one of the key items of economic growth strategy under Abenomics. The Japan's Stewardship Code, originally formulated in 2014, was revised in 2017, while the Corporate Governance Code, introduced in 2015, was revised in 2018.

How would you evaluate the progress of governance reform to date?

Inoue:

Basically, I feel steady progress has been seen in corporate governance reform since the introduction of the two codes. Since last November, we have held new sessions of the Council of Experts Concerning the Follow-up of Japan's Stewardship Code and Japan's Corporate Governance Code. Though some in the Council have noted recently that there is room for further reform, most of the experts said they saw steady advancement.

Several data points support a view of solid progress. For example, the percentage of companies listed on the Tokyo Stock Exchange (TSE) with two or more independent directors increased from 21.5% in 2014 to 91.3% in 2018. Among JPX Nikkei 400 companies, the figure reached 97.7% in 2018.

We also have positive data on the investor side. According to FSA's survey, as of October 2018, over 100 institutional investors disclosed voting results on an individual agenda basis at annual general meetings of their investee companies. In December 2016, just before the revision of the Stewardship Code, only 15 did so.

Based on the data, I think without doubt steady progress has been made in governance reform. I also feel a new wind blowing in reform activities in both business and investment. It seems the next focus should be on ensuring the effectiveness of those actions and prompting more constructive dialogues between companies and investors.

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IJ:

Is that to say you are a little disappointed with the development of dialogues between companies and investors?

Inoue:

As I mentioned earlier, I think we have seen progress in governance reform on the whole, including dialogues between companies and investors. At the same time, I have heard that many of those dialogues are little more than formalities and only a limited number of them have generated any meaningful insights for companies.

In order to deepen the governance reform and to move its focus from 'form' to 'substance', last year FSA published "Guidelines for Investor and Company Engagement" in conjunction with the revision of the Corporate Governance Code. We hope the Guidelines will make company-investor dialogues more constructive from now on.

IJ:

FSA's revised Corporate Governance Code also addresses corporate pension funds, with the addition of "Principle 2.6, Roles of Corporate Pension Funds as Asset Owners," which states: "Because the management of corporate pension funds impacts stable asset formation for employees and companies' own financial standing, companies should take and disclose measures to improve human resources and operational practices…" What does that mean in practical terms?

Inoue:

"Measures to improve human resources and operational practices" includes various items, for instance, placing suitably qualified human resources in the administrative office of pension funds and the asset management

committee, developing those human resources, and assisting pension officials in their stewardship activities with asset management companies.

Of course, companies are required to act appropriately, based on factors such as the type and size of pension funds, and the company's business situation.

Nearly all of the public pension funds have become signatories to the Stewardship Code, while only 14 corporate pension funds are signatories so far. But just recently the signatories from corporate pension funds have been increasing, especially those from non-financial sectors.

FSA plans to promote stewardship activities of corporate pension funds by cooperating with other organizations such as the Japan Business Federation (Keidanren), which sent letters to its member companies last December requesting more stewardship activities in their pension funds.

IJ:

What issues in corporate governance reform does FSA plan to address next?

Inoue:

In the current sessions of the Council of Experts Concerning the Follow-up of the two codes, new agenda items are already being discussed based on the current status of corporate governance activities. The new items include 'management with an awareness of the cost of capital', 'enhancing governance functions of boards', 'cross-shareholding', 'issues concerning stewardship activities including corporate pension funds', 'ensuring confidence in audits', and 'enhancing information in corporate disclosures'.

Prior to the annual general meeting season in June, the Council is expected to release a statement concerning effective dialogues between companies and investors, and other activities intended to promote further progress in corporate governance reform.

As for future challenges, I think we need to enhance the promotion of Japan's corporate governance reform to foreign investors. To that end, FSA officials, including myself, have engaged in efforts recently, such as addressing meetings of investors in London and New York. FSA and TSE will support the 2019 Annual Conference of International Corporate Governance Network to be held in Tokyo, next July.

I would like to say to foreign institutional investors, please visit Japan and see for yourself the recent changes in Japan's corporate governance.

Toshitake Inoue
Toshitake Inoue

Director, Corporate Accounting and Disclosure Division, Policy and Markets Bureau, Financial Services Agency (FSA)

1991 Joined Ministry of Finance (MOF) after earning a law degree from the University of Tokyo

2014 Director, Securities Business Division, Supervision Bureau, FSA

2015 Director, Insurance Business Division, Supervision Bureau, FSA

2016 Director for Credit System, Plannning and Coordination Bureau, FSA

2018 present post