In order to improve lagging corporate governance practices, the Financial Services Agency of Japan (the “FSA”) is currently in the process of establishing a Japanese version of the UK Stewardship Code, which was introduced in 2010 by the Financial Reporting Council of the United Kingdom. The Japanese version of the code may, as a part of their fiduciary duties, require institutional investors, such as pension funds and insurance companies, to (i) monitor their investee companies; (ii) establish and disclose clear guidelines for voting policy; (iii) disclose voting records for each proposal; and (iv) have engagement with investee companies. However, unlike the SEC’s proxy voting disclosure rules in the United States, the Stewardship Code is applied on a “comply or explain” basis.
On August 6, 2013, the FSA held the first meeting of the Review Panel Regarding the Japanese version of the Stewardship Code and it’s expected to compile a final plan by the end of the year and enact it in 2014. The establishment of the Stewardship Code is, together with the amendments to the Companies Act that promote the installation of outside directors on the board, a part of the Japan Revitalization Strategy which was approved by Prime Minister Abe’s cabinet in June 2013.
Establishing the Japanese Stewardship Code may encourage foreign investments. The Japanese market is traditionally filled with cross-shareholding relationships between business partners, and these shareholders automatically support the management’s decision by essentially giving a blank check. In order to attract overseas investments to such a market, it is necessary to enhance fairness and transparency in corporate governance practices. One way to do this would be by strengthening the shareholder’s presence through investors’ active contributions to promote the mid- to long-term growth of companies. The clarification of the responsibility of institutional investors is expected to be the first step to bringing in foreign exchange.
Currently, the principles of the Japanese Stewardship Code are still under consideration. One such principle, the disclosure of voting records for each proposal, is particularly noteworthy as some funds claim that forcing institutional investor to disclose publicly their vote results will lead them to cast in a manner that is in the interests of groups other than its shareholders. However, unless it allows directly monitoring the activities of institutional investors through the detailed voting records, the Japanese version deserves criticism for being nothing more than a lax version of the UK Stewardship Code.