In this third interview about corporate governance reform in Japan, IJ spoke with Kerrie Waring, CEO of International Corporate Governance Network (ICGN), a London-based international body leading the formulation of global standards for corporate governance and investor stewardship. Waring spoke to us in early March, while in Tokyo to attend the Council of Experts Concerning the Follow-up of Japan's Stewardship Code and Japan's Corporate Governance Code. She recommended several governance reform initiatives, including: integrating ESG investment and board decision-making, improving investor reporting, and instituting performance evaluations to improve the quality of corporate boards.

Japan (IJ):

As a member of the Council of Experts Concerning the Follow-up of the two codes at the Financial Services Agency (FSA), you are presumably quite familiar with the current status of governance reform in Japan. What is your take on the past five years of reform activity here?


It is impressive to see the reforms taking place in Japan: both in terms of the Stewardship Code and Corporate Governance Code – this provides a road map for Japanese companies and investors as to what constitutes good corporate governance and stewardship.

The FSA's stewardship code is unique in a number of ways, firstly with its emphasis on the important role of asset owners and their responsibilities; and secondly the focus on the importance of stewardship resources ¹. These references echo ICGN's Global Stewardship Principles whereby our first recommendation focuses on having effective foundations in place from the outset in order to ensure robust stewardship practices.

Japan has introduced a series of reforms within a very short time. There have been some significant regulatory instruments put in place. For example, the Tokyo Stock Exchange's (TSE) review of the Corporate Governance Code last year; the Ministry of Justice has undergone a review of corporate law; and Ministry of Economy, Trade and Industry is doing a lot of work on many different fronts. We should also applaud Japan for being the first country outside the UK to launch the Stewardship Code.

What was particularly interesting in the 2017 review [of Japan's stewardship code] was the introduction of collaboration in Guidance 4-4 ². This is important for foreign investors who want to feel that they can coordinate with domestic investors to support their engagement efforts with companies. We were delighted to see that come through.

I think it's really encouraging to note the number of pension funds [signing on to the code] is increasing. If we can encourage more corporate pension funds to adopt the stewardship code, that would be excellent.

¹ Principle 7 of Japan's Stewardship Code: To contribute positively to the sustainable growth of investee companies, institutional investors should have in-depth knowledge of the investee companies and their business environment and skills and resources needed to appropriately engage with the companies and make proper judgments in fulfilling their stewardship activities.

² Guidance 4-4 of Japan's Stewardship Code: In addition to institutional investors engaging with investee companies independently, it would be beneficial for them to engage with investee companies in collaboration with other institutional investors (collective engagement) as necessary.


Indeed, the number of corporate pension funds signing on to the code has been increasing, but it was still only fourteen as of Dec. 2018. Considering there are more than 700 corporate funds, we have to say that's too little and too slow.


I know, but this is not just an issue for Japan. Many markets are struggling to increase the number of corporate pension funds, so we do need to think about how we should encourage the corporate pension fund community globally.

I note the recent initiative under the leadership of Keidanren (Japan Business Federation) and [its chairman] Nakanishi-san, to encourage corporate pension funds to participate in the stewardship code – having such a corporate champion will make a huge difference.


What do you think Japan should do next in terms of stewardship activities?


In terms of what more we can do for the stewardship movement, not just in Japan but globally, it's more about how to actually put into practice what the principles are saying. I think ESG integration, of all the factors that impact long-term corporate performance, could be emphasized more. It's briefly mentioned in the code, but it needs to be emphasized much more.

More emphasis around voting could be helpful in Japan's stewardship code. For example, by having more recommendations around disclosure of the voting decision-making process, voting accountability, and the degree to which proxy advisors influence voting outcomes. We also think reference to stock lending (currently footnote 14 in the code) could be elevated to Guidance to ensure that investors disclose their approach to stock lending and any impact this has on voting.

A final point to note would be to apply the concept of stewardship across all asset classes. ICGN's Principles note that stewardship policies should address the scope of assets held in an investment portfolio including but not limited to, listed equities and debt obligations. More recently, the UK Financial Reporting Council is proposing to introduce stewardship responsibilities for all asset classes, noting that 'capital is allocated to a range of asset types over which investors have different terms, rights and levels of influence.' It would also be interesting to note whether reporting on the outcomes and activities of stewardship comes in to play here as is being considered in the UK ³.

³ In January 2019, the UK Financial Reporting Council published a public consultation on Proposed Revision to the UK Stewardship Code, which is under consideration.


Let's move on to the movement around corporate governance in Japan.


We were very pleased that the code was revised last year. I saw improved references to cross shareholding, the mention of the importance of independent committees, and the inclusion of a committee to appoint or dismiss the CEO. Those are three key elements.

I do think we should also recognize and applaud the increased number of independent directors. However, we all know that the most important thing is quality over quantity. Our efforts now really need to focus on the competence of independent directors to really play a constructive role in challenging management strategically to help support the long-term sustainability of companies.


What should we do first to improve the quality of corporate boards?


The board is collectively responsible for overseeing the performance of the CEO and within that, it's imperative that we have that level of independence so that remuneration and nomination committees can really start to play a more focused role in those functions. This seems to be a lacking here in Japan.

Board quality is dependent on board diversity. To improve board quality there needs to be regular board refreshment to allow company board's to open up space for new directors. This should be based on the outcomes of the board evaluation and the creation of a skills matrix. What does the business need over the next five-years? Do we currently have on the board the skills needed to meet that objective? If the answer is no, then the board will need to consider seriously whether each of the directors are still appropriate and then we may get some rotation on the board. We really need to encourage long-tenured directors to retire if their skills no longer match the strategic needs of the company. Once you unlock the space on the board, then you may see some fresh thinking and with that comes a great deal of independence.


We imagine you would say companies in Japan need to make greater efforts at implementing ESG. Is that right?


Boards in Japan seem to be embracing ESG and really trying to articulate their efforts in their reporting around ESG to investors. I think Japan is recognized in the world as having the most ESG reports. Is that correct? So that's something to be applauded.

And again, I think on the investor side, GPIF (Government Pension Investment Fund) has pushed for many ESG related improvements, particularly around reporting. This has a market-wide effect because not only are companies producing better ESG reports, but investors are being incentivized to make sure they analyze them thoroughly. So that's a fantastic initiative, but we need more practical tools to help investors and companies put into place what the corporate governance and stewardship codes are calling for.


ICGN will hold its annual conference in Tokyo in July. What made ICGN choose Tokyo as the site this year? And what highlights can we expect at the conference?


We choose a conference location by geographic rotation. This year, we needed the location to be in Asia and it needed to be in a market where there'd been significant progress on reforms. That was Japan.

I also think my participation on the Council has really helped enrich the ICGN's understanding of what's happening here and likewise, I'm hopeful that we've also helped introduce some new concepts here to the Japanese market.

The first conference session will really focus on Japan. Appropriately, we will focus on the latest developments here and the first plenary session after that will be about linking sustainable finance to the real economy. We were inspired by the IPCC's (Intergovernmental Panel on Climate Change) report. The notion that we're actually going backwards in terms of how we're managing climate change is really terrifying, so we've got some expert speakers from around the world on that panel.

We are hosted by the TSE, which is a real honor for us. We're working with the TSE and lots of local partners and media outlets like yourselves. We will raise awareness of the event and hopefully have a well-attended meeting. We'd expect between six to seven hundred people to attend the meeting.


Thank you very much.

About ICGN:

Kerrie Waring

Kerrie is responsible for delivering ICGN’s extensive work programme of policy representation, international conferences, education and guidance across 50 markets.  She has been instrumental in shaping ICGN’s strategy to drive global governance reform over the past decade and has led rapid membership growth which today includes investors responsible for assets under management in excess of US$34 trillion.

Prior to her appointment at ICGN, Kerrie directed high profile governance initiatives at the Institute of Chartered Accountants in England and Wales where she led a cross-Atlantic initiative focused on US-UK corporate governance.  Earlier, she was international professional development manager at the UK Institute of Directors, where she established IoD International and the Global Director Development Circle (now known as the Global Network of Director Institutes).

Kerrie is a lead author of the IFC’s Global Director Training Toolkit which has helped establish governance associations around the world and co-authored the Handbook on International Corporate Governance (2004), among a series of other publications.  Kerrie was named Rising Star of Corporate Governance by the Millstein School of Corporate Governance and Performance at the Yale School of Management (2008).  Kerrie has been a member of Japan's FSA Council of Experts since January 2017.

A chartered company secretary and fellow of ICSA, she holds a BA honors degree in international business and Japanese.