2017 Reports

The Unfinished Business of Japan’s Stewardship Code

Hokugo, Ken; Ogawa, Alicia

Japan’s Corporate Governance and Stewardship Codes are potentially the most powerful of the initiatives constituting Prime Minister Abe’s “third arrow” of his “Three Arrows” vision for revitalization of Japan’s economy. The 2014 Stewardship Code seeks to hold institutional investors responsible for enforcing the new requirements for transparency and management oversight which are now required by the Corporate Governance Code and related legislation, such as the amendments to the Company Act. There has been a great deal of change in corporate organization and board structure in response to the Corporate Governance code---a great deal of it perfunctory and without strategy. On the stewardship side, even this level of progress has been slow by comparison. Impediments to more active engagement by investors with their investee companies include a persistent level of silent ownership of the market and conflicts of interest inherent in the financial conglomerates which dominate the Japanese market. While the Financial Services Agency has taken steps to address these issues, the legal and regulatory environment discourages institutional investors to act in concert with others to advance an agenda, and leaves investors open to legal risk of insider trading. The UK has developed a framework to encourage collective action by investors, while Japan and the United States have yet to do so.