Spotlight on Japanese Corporate Governance


With the flight of former Nissan executive Carlos Ghosn from Tokyo to Lebanon, and Ghosn’s criticism of the Japanese business and legal system, we thought this might be a good time to take stock of Japanese corporate governance practices. EconVue expert Marsha Vande Berg begins the discussion from a global perspective, and fellow expert Nicholas Benes responds on the ground from Tokyo. We invite readers to comment as well.


Panel Discussion


Marsha and Nick, really appreciate your comments and the excellent background about the current state of corporate governance in Japan. Although developments with Japanese pension funds such as GPIF seem promising, I still think since the Bank of Japan remains the largest shareholder of many companies on the TSE, as long as it remains a passive investor true reforms will be stymied. How do you see the BOJ role going forward?
Nicholas Benes, responding to Marsha Vande Berg's article:

Just as Marsha writes, Japan is making progress. However, as is the case anywhere I the world, progress is nuanced. The GPIF’s push for ESG is very good over the long-term and well-intended, but in the short term it has been interpreted by many as a sort of PR opportunity for Japanese companies and investment institutions to “look good “ in Environmental and Social areas (E and S), while distracting attention from the fact that many companies are still weak in the area of “G” (governance practice).

Japan has ESG where the ES topics are in bold large cap fonts – a sort of a fad -, but G is in lower case, not bold font, still not discussed as much as is needed. But the reality is that this priority needs to be reversed, and more pressure for that needs to come from institutional investors. Japan needs to focus most of all on first improving governance, because only then will boards seriously focus on the E and S factors that most affect both their financial performance and long-term sustainability, and continuously monitor a focused list of criteria so as to actually achieve those objectives. Otherwise, ESG is a bus without a driver; or the driver is not the board but rather IR companies that write glossy integrated reports that just try to make the company “look good” in general. This situation will not result in much consistent momentum towards true “sustainability”.

I outlined some of these concerns in my recent public comment to the FSA regarding revision of the Stewardship Code (SC) : which can be viewed here: Here, I also wrote: “The proposed revisions to the Stewardship Code do not make it clear enough exactly how corporate pension funds, or smaller pension funds of any type, can sign the Code and comply with it without bearing excessive cost, work, or confusion. Because this is not sufficiently clear at present, to date only an extremely small number of the defined-benefit pension funds at listed non-financial companies in Japan have signed the Code (only about 10, out of a total of 700 or more such funds). As a result, a rather odd situation exists in that most Japanese companies claim to care for their employees deeply, but judging from their actions, do not seem to care much about employees’ investments or post-retirement quality of life – or even, to care about preserving shareholder value by reducing the cash infusions needed to keep their pension plan fully funded. This makes a mockery of the language in the Corporate Governance Code about stewardship (Principle 2.6 企業年金のアセットオーナーとしての機能発揮), and of the Stewardship Code itself.”

The numbers “only about 10, out of a total of 700” are rather shocking. Oddly, the same MHLW which regulates the GPIF, is not on the same page as the FSA when it comes to stewardship. As you can read further down in my public comment, MHLW has done virtually nothing concrete to change this situation, in which pension fund resistance to signing the SC largely results precisely because of the very issues the Stewardship Code is trying to address: many pension funds have inherent conflicts of interest with the sponsor company (which is not good for employees or pensioners) or the pension fund is a sort of “amakudari” post-retirement pasture for senior executives, and similar issues . MHLW is not properly protecting the interests of either pensioners or companies. Said simply, it is not doing its job. (I write this because if better stewardship (e.g. without conflicts and better oversight of fund managers) results in higher returns for the pension fund, this will not only increase the chances that employees will receive what they are owed after retirement, but the company will have to inject less cash into the pension fund in order to keep it fully-funded. This is a win-win circle.

Because it is politically not feasible for the GPIF itself to set forth clear guidelines for governance practices on paper, it took me several years and a public viewpoint to encourage the GPIF to simply acknowledge the existence of Japan’s own Corporate Governance Code in its investment and proxy voting principles, let alone any statements about the specifics in it that they prioritize. Now they do so, but this started several years after I first proposed the CG Code to the government and it was put in place. Mr. Mizuno and the GPIF are in a difficult position in this regard. At the same time, the GPIF refers to two “environmental” indices and one “social” index , it does not refer to any specifically “governance” indices or standards. It only creates ESG indices where the standards for the governance part are not very clear. See page 3 of .

At The Board Director Training Institute of Japan, we try to educate directors or directors-to-be on “what is ESG and why are investor interested in it? ”. What I emphasize as a key conclusion to this section, is that it is the combination of “good company ESG characteristics PLUS high and sustainable ROI” which generates a virtuous cycle. In other words, if ROI is consistently low or negative, the company will not be very “sustainable”, even if its ESG characteristics “look good”.
The evidence is still out but hopes are high that Japanese institutional investors focused on sustainability and corporate governance reforms can convince Japan Inc. to comprehensively embrace reforms designed to improve productivity and ultimately deliver higher returns. Corporate governance reforms, a cornerstone of Abenomics, started taking hold in 2014. Today, GPIF, the world’s largest pension scheme is among their most vocal champion in linking reforms to a holistic emphasis on long-term sustainable investment strategies.

GPIF’s success and that of others in the upper echelons of government and industry as well as finance will depend on their ability to win the hearts and minds of mainstream investors and corporate Japan. The path forward is not straightforward, complicated by developments like recent limits on foreign investment in Japanese equities. Still progress is incremental, and the reforms being championed appear here to stay with the promise of long-term impact for Japan’s social agenda, her corporate governance and sustainability as well as the country’s ranking as the world’s third largest economy.

Two sets of circumstances support the point. First, Tokyo is pinning its reputation as an international economic powerhouse to initiatives designed to attract foreign interest and investment at the same time it is advancing the global cause of stewardship and sustainability. In addition to Abenomics’ emphasis on Japan’s competitiveness, environmental sustainability is central to the “discover tomorrow” thematic for the Tokyo 2020 Olympics, underway come July. At the same time, Tokyo’s intention is to be premier among Asia’s leading financial centers in its emphasis on sustainability practices in finance.

Second, the country’s new and revised Stewardship and Corporate Governance codes, although voluntary, link explicit references to investor responsibility and corporate governance with social and environmental sustainability. Principle 2.3 of the revised Corporate Governance Code states, “Companies should take appropriate measures to address sustainability issues, including social and environmental matters.”

GPIF is clearly in the lead as an advocate of investing based on sustainability practices and precepts together with the reforms that are intended for Japan’s corporate and investment culture. Under the leadership of its star chief investment officer, Hiro Mizuno, the pension fund is directing the investment of retirement monies of Japan’s seriously aging population inclusive of an emphasis on sustainability.

Mizuno defines GPIF as a “100 percent, long-term investor over 100 years or more”. To succeed, he is undertaking a multi-prong effort to require that asset managers who are contracted to manage his fund’s portfolios invest in line with sustainability factors together with the principles laid down by the new Stewardship and Governance codes and sets of guidelines which among other things, encourage active engagement with investee companies. Engagement gives institutional investors like GPIF more latitude in making their case for reforms directly with corporate managers and directors.

And Mizuno is not stopping there. Since joining the fund in 2015, a year after Japan’s first round of corporate governance reforms under Abenomics, the GPIF CIO initiated the pension scheme’s visible and pronounced shift to responsible and sustainable investment. His approach is noteworthy.

Not only is he investing GPIF’s asset directly in environmental, social and governance-related (ESG) investments, he also is directing his portfolio managers to holistically integrate ESG factor-analysis into the investment selection process. He enforces this mandate by linking performance fees to successful ESG-related outcomes. He is building a green bond and fixed income portfolio as well as broadening GPIF’s use of ESG-related indices. By tracking positive-screening ESG indices, the fund intends to coax companies into paying greater attention to sustainability, to be more forthright about what they disclose about their environmental and social impact, and to conduct their overall business more sustainably.

In 2015, Mizuno prominently signed GPIF up as a signatory to the United Nations-supported Principles for Responsible Investment, obligating the fund to apply PRI’s responsible investment principles across its investment strategies. He also has since joined the Board of Directors of PRI, a prominent international advocate. Meanwhile, he is integrating application of the UN’s Sustainability Development Goals (SDGs), a set of standards designed to reset the global commons more equitably.

Along these same lines, GPIF also is advocating that Japan Inc. incorporate in their sustainable assessment and disclosure practices a set of international recommendations for taking account of a fund’s or corporation’s carbon footprint. Promulgated in 2015, the Task Force on Climate-related Financial Disclosures (TCFD) guidelines offers a set of international standards for measuring environmental impact. Their importance is as a set of credible standards against which companies can assess the material impact of their carbon-related activities on enterprise value. As of late spring 2019, 80 Japanese companies had supported application of the TCFD framework, including global brand, Toyota.

Despite the comprehensive advocacy, the campaign for greater emphasis on sustainability as an extension of corporate governance has yet to captivate the interests of mainstream Japan Inc. While institutional investors elsewhere are pulling the phenomenon off the sidelines and into the mainstream, GPIF’s success and that of the others still bear the markings of early steps. Ultimate success will require a wider, more comprehensive embrace inclusive of the rank and file manager,

Ultimate success will require a holistic approach to sustainability not only as an extension of corporate governance but as representation of a new corporate culture that integrates sustainable principles as cornerstone to enterprise value. “I think the tipping point for ESG will likely happen when ESG is integrated into investment analysis and tied to performance,” Mizuno told a Bloomberg interviewer in May 2019.

Japan is still some way away from reaching Mizuno’s tipping point even though it does rank in the top five regions in terms of assets committed to sustainable investment. According to the Global Sustainable Investment Review 2018 (GSIA), Japan, the United States, Europe, Canada, Australia and New Zealand are the top five regions responsible for $30.7 trillion in sustainable assets under management globally. Japan’s ranking reflects an all-inclusive definition of sustainable investment as well as the influence of both the reforms to date and the powerful organizations that are in support, including government ministries like the Ministry of Economic Trade and Industry (METI) and influential business and industry organizations, including the Keidanran (Japan Business Federation) and the Japan Securities Dealers Association.

The lack of pick up by the mainstream is the focus of a report released late last year by the private Japanese foundation, The Sasakawa Peace Foundation (SPF). The findings report a disconnect between an increase in sustainable investing in Japan and its comprehensive uptake by investors. It laid the blame on insufficient information about what is sustainable investment and how it’s done. Myths are pervasive, including thinking that ESG-factor investing is a fad destined to pass, the report said. Consequently, investors reason there is little value in devoting time and resources to integrating sustainability in strategies for which the competitive track record also is in question.

The report, “Sustainable Investing in Japan: Agenda for Action” was co-authored by Steven Lyndenberg and William Burckart, also the co-founders of The Investment Integration Project (TIIP). Their bottom line is to recommend that Japan’s officialdom undertake a comprehensive campaign to raise awareness, including tapping influential advisors from Asia and elsewhere who can help advance Japan’s visibility on the sustainability front.

It remains to be seen whether their recommendation is taken up in any meaningful way – or whether the ultimate push to get to Mizuno’s tipping point of full integration of sustainability factors continues to be slow-paced and incremental. Taking time to overcome resistance to such sweeping corporate cultural change is to be expected, and hence the commitment at the upper echelons of power and authority will be critical either way.

While making reforms mandatory and enforceable by regulators instead of on a voluntary basis could have been the most helpful, soft rules backed by powerful sources of influence can succeed in pushing forward sweeping change. At the end of the day, it’s changing hearts and minds and hence entrenched cultural behaviors that is at stake. What’s important is that change continues to evolve with import for Japan’ social agenda, its standing as a global economic power as well as its corporate governance.