All change for Japanese corporate governance

As the Japanese AGM season kicks off, companies will be preparing for somewhat more stormy meetings in a month that has seen the introduction of the country’s new corporate governance code.

The new code requires Japanese companies to appoint at least two independent directors to their board. These firms will also have to talk about executive succession plans and procedures for remuneration – something that Ben Adams, executive manager at the New York branch of consultancy IR Japan, says has never happened in the country before.

And the governance code, which came into effect on June 1, is just the latest in a raft of changes. The government introduced its stewardship code last year – calling on investors to seek greater dialogue with Japanese firms – and has also amended the Company Act. ‘These things have been so very alien to Japan up until now and the changes are all coming into practice at once,’ says Adams.

In future, the details of all that’s required by the corporate governance code will normally be published right after the annual shareholder meeting. But because so much change is taking place in such a short time – and such a large number of independent directors will need to be found – Tokyo Stock Exchange has allowed companies to either comply or explain why they haven’t done so by the end of the year.

Adams explains that, at present, Japanese firms are largely split into two camps. Leading Japanese companies with operations spanning many countries are more aware of what’s required by foreign investors in terms of corporate governance, for example. ‘A few of these firms have already transferred to the US-style of governance,’ he says. ‘Then you have a second, larger group of companies, that are usually domestic, very often much smaller and the founder’s family might still be running the company. These companies are very comfortable with the [existing] system. I don’t think they really feel the need for change.’

Despite the many potential challenges, Adams says these changes have led to a huge increase in engagement, with an increasing number of companies talking to their shareholders to figure out what exactly they’re looking for. Coupled with the increased engagement brought in by the stewardship code, these changes have pundits predicting a very volatile AGM season – especially at poor market performers like electronics maker Sharp, which may face unusually strong dissent during proxy season.

Toshiba is also likely to face pressure over a probe into accounting irregularities that has forced it to suspend its year-end dividend and kept the company from closing its books for the year through to March.

View from the buy side

While much has been made of the challenges Japan faces in implementing a genuine corporate governance upheaval, fund managers at Ruffer, the UK investment firm that has had between 15 percent and 20 percent of its portfolio invested in Japan since 2011, are positive about the changes taking place.

Franziska Jahn-Madell, responsible investment manager at Ruffer, who has been heading up the investment firm’s work in terms of corporate governance both in the UK and in Japan, and Alex Lennard, investment director at the firm, say the atmosphere in the Japanese financial community and among the country’s corporates is encouraging. ‘Because we’re active stock pickers we will always talk to companies – not just about corporate governance but also about all sorts of issues we feel are important to us,’ says Jahn-Madell.

Ruffer’s engagement with ‘a huge number’ of Japanese corporates, ‘not only in Japan, where our analysts spend up to 10 weeks a year’ but also at the firm’s London offices means its fund managers ‘get good visibility into the changes going on,’ adds Lennard.

He acknowledges that’s not necessarily been the case for the broader investment community, however. ‘A lot of companies simply don’t have the infrastructure to engage with Japanese corporates,’ he says.

But with companies taking steps to engage more – especially with foreign investors – and some, such as robotics giant FANUC, adding an IR function for the first time, it finally might be time for a Japanese corporate governance revolution.