Proxy advisers promise Japanese return-on-equity advice

ISS, one of the globe’s most far-reaching proxy advisory firms, is likely to cover advice concerning return-on-equity (ROE) figures in its voting guidelines for Japanese companies next year, as part of a concerted effort to promote better conditions for foreign shareholders.

The news comes as Japan’s government has been calling for companies to adopt outside board members and pushing for the launch of a new – and yet unnamed – domestic stock exchange that will promote firms with a high ROE and high standards of corporate governance.

Earlier this year, the government also published the ‘Principles for Responsible Institutional Investors: Japan’s Stewardship Code’, which promises to ‘promote the sustainable growth of companies through investment and dialogue’ and identifies how to improve accountability and communication for shareholders and corporate boards.

The moves are intended to lessen tensions between Japanese companies and foreign investors, whose value approach – particularly with a view to boosting ROE – is often dismissed by management.

In an interview with Reuters, Takayuki Ishida, executive director of ISS in Japan, explains that the proxy advice company has conducted a survey about the proposed changes among its clients. Most of those questioned believe considering ROE when voting in company directors is of benefit. ‘Our clients think it’s a good idea to incorporate, so we’d like to do it,’ he continues. ‘We haven’t yet decided on details on how it could be done, but it is something we want to do.’

As a metric for shareholders, ROE has historically remained consistently low at Japanese companies. Market commentators say this is in part due to the country’s investing culture prioritizing the interests of employees and business partners over those of shareholders.

According to the Life Insurance Association of Japan, the average ROE at companies listed domestically – and excluding those in the financial sector – hovers around 5 percent, compared with a mean of more than 15 percent at listed US companies.

Ishida, meanwhile, says ROE is becoming an increasingly useful tool for shareholders. ‘There was a time when ROE was associated with something negative, such as demands from ‘greedy’ shareholders,’ he continues. ‘But it’s becoming something normal to talk about, less negative.’

He also points out that ISS is not planning to change voting guidelines for Japan this year; the firm will instead decide over the coming months on how ROE can be integrated into its guidance for 2015 onwards.