Japan closes corporate governance gap with other countries

Improvements in corporate governance in Japan have been particularly notable in recent years, with governance reviews and other codes being the latest examples of internal pressure.

Money officials also stressed the importance of former Prime Minister Shinzo Abe’s push for structural reforms in 2012 through his “three arrows” economic policy.

“The priority given by the government to reforming the corporate sector – a policy pursued with equal vigor by the new Prime Minister Yoshihide Suga – has had a significant influence on increasing the profitability and performance of Japanese companies, as well. that on returns for investors, ”said Tokyo-based Archibald Ciganer. Japanese equity strategy portfolio manager of T. Rowe Price Group Inc., in an email. “For several years now, we have been promoting the concepts of good practice, strong ESG disclosure and improved stakeholder engagement, as they are essential for long-term sustainability. “

Mr. Ciganer said governance standards and returns for investors are improving rapidly, “closing the gap with European and US equity markets.” The improvements include a more efficient allocation of capital by Japanese companies, the payment of higher dividends and increased share buybacks.

But concerns remain for those investing in Japan, namely the representation of women at the executive level, the size of boards of directors and the structure of board committees.

“We call on companies to tackle the root of the problem – most Japanese companies suffer from a serious lack of female representation at the executive level,” said Kei Okamura, director of investment management in Japan at Neuberger. Berman Group LLC in Tokyo. “This ratio continues to refine as you move up in the hierarchy.”

The company pushes companies to have “a management commitment to the problems …

Unless there is a target in place for the representation of women at the executive or executive level, not just in the boardroom, “we’ll talk about a lack of female directors for the top 10. to the next 15 years. My daughter is going to grow up and ask why there are no opportunities for women – and I really don’t want to answer that question in 20 years, ”said Mr. Okamura.

Regarding the size of boards, Rob Hardy, director of corporate governance at Capital Group in London, said board sizes are dropping by more than 20 at times. “Above 20 is too big to have a meaningful discussion. Ten to 12 is good,” Mr. Hardy said.

And a big problem for some managers and companies is that directors always chair certain committees, which sometimes gives rise to potential conflicts of interest.

“One problem we’re seeing is that CEOs will often be part of and chair the nominating or compensation committee – I would love to be part of my own compensation committee – but there is clearly a problem with (that),” he said. said Chris Vilburn, based in Tokyo. Head of Asia Management at Goldman Sachs Asset Management.

Shizuko Ohmi, head of investment management for Japan at JP Morgan Asset Management in Tokyo, agreed that there is a need to separate chairmen and CEOs on boards so that the same person does not hold them. two titles. “It’s always something that should be addressed in the future.”

Ms Ohmi added that in addition to gender diversity on boards, there are also different nationalities and ages to consider. “Generation is another… area where diversity is much more deserved,” she said.

And while much has been accomplished in the past few years, CFOs expect the next 12 months to bring big changes in corporate governance.

The groundwork is being laid this year, but the real changes will take place next year, said Neuberger’s Okamura.

“For the past two years we’ve had COVID (to manage), so proxy advisers have put some guidelines on hold,” relating to return on equity, for example. “ROE is important. They’ve suspended this because of COVID, so (votes against management on that basis) have leveled off for the past two years. It will likely be back next year,” Mr. Okamura.

Mr. Ciganer of T. Rowe agreed that the focus on improving corporate governance “will only accelerate, creating both risks and opportunities for companies as they respond or are falling behind the pace of change ”.

Executives also expect environmental concerns to become more prominent in proxy voting programs.

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