TOKYO -- Nothing makes the Japanese heart beat faster than a good, solid trend. Whether it's Gucci handbags, honeymooning on Australia's Gold Coast, single malt, cell phones or the latest titanium golf club -- once it's the thing, everyone's just got to have it.
This bandwagon mindset is now combining with a long steep fall in investment returns to make corporate governance the "next big thing" in Japan.
The Japan Pension Fund Association, the umbrella organization that regulates and administers the national pension scheme covering employees at companies with fewer than 500 employees, in June fired a shot across the bows of corporate boards when it released a set of guidelines on the exercise of shareholder voting rights.
The aim, said Keiichi Miki, senior portfolio manager at Jardine Fleming Investment Trust and Advisory Co., is to imitate the California Public Employees' Retirement System by pressing Japan Inc. to pay more attention to shareholders' rights.
The PFA guidelines urge pension asset managers:
* To encourage active management oversight aimed at increasing investment returns for pension beneficiaries
* To support corporate management that emphasizes shareholder returns.
* To insist on adequate and timely disclosure of information on corporate activities.
* To exercise voting rights in consideration of the investment returns to pension funds.
In exercising voting rights, the PFA suggests fund management trustees should look at the composition, size and functions of corporate boards, the functioning of auditors, profit distribution, financial and business strategies and social responsibility.
"Basically, the guidelines are a very good start toward effective corporate governance in Japan," Mr. Miki said.
"Two very positive proposals are that the PFA is setting a basic policy while leaving the exercise of voting rights to asset managers, and that it is urging asset managers to maintain close contacts at companies where they are investing pension money. One criticism I would have is that some fund managers also handle corporate assets, which opens the door to potential conflicts of interests."
If corporate governance is not virgin territory in Japan, it certainly has not played much of a role in pressing companies to consider shareholders' return on investment.
"Pension funds have taken no active role in the past, and trust banks have done nothing with the voting rights they've held as registered owners of shares on behalf of the funds," said Yoshinobu Kono, vice president of the pension services group at Goldman Sachs (Japan) Ltd. and a member of the PFA committee that prepared the guidelines.
One of the most important goals of PFA in issuing the recommendations was to set a policy on which trust banks could base proxy voting, he said.
Just how far trust banks, which together with life insurers have long monopolized management of Japanese pension assets, will be willing to go in exercising those rights is an open question. Many observers of the pension scene here point to the commingling of pension fund assets, corporate assets and the portfolio holdings of trust banks themselves as a stumbling block.
"Trust banks have the legal proxy rights as administrators of pension assets, but have done nothing," Mr. Kono said.
Hiroshi Nakagawa, managing director of the Tokyo office of InterSec Research Corp. agreed. "Trust banks and life insurers have enormous bargaining power, more than half of it on behalf of clients, but have failed to use it."
Pension fund sponsors finally are fed up, he said. They want more efficiency and higher dividends and increasingly are pushing trust banks to segregate their assets from those of other bank clients.
Yasuda Trust & Banking, for one, has agreed to do so.
Mitsui Trust & Banking reportedly cast negative votes on one or more management proposals for the first time at a shareholders' meeting in June, on instructions of a pension fund.
The bank's only comment was that it "exercised proxy rights in consideration of the PFA guidelines."
Some reports heralded Mitsui's action as a revolution in corporate governance activity, but "overwrought" is how Takaya Seki characterized that description. Trust banks are amenable to exercising proxy rights on behalf of pension funds and other institutional investors, insisted the assistant general manager of the corporate agency department of Toyo Trust & Banking. But there are structural problems that need addressing, specifically the lack of a master trust custodial function, the fact that trust banks both administer custodial rights and act as fund managers, and crucially, Mr. Seki said, the lack of any ERISA-like legal framework to require pension funds to play more active roles in demanding higher investment returns for their beneficiaries.
That view is echoed at the Japan Investor Relations Association, Tokyo, where program director Yoshiko Sato and chief research fellow Hisashi Watanabe agree Japan badly needs an equivalent to the United States' Employee Retirement Income Security Act if pension funds are to influence corporate management.
"Japanese corporations rely on banks to a degree unheard of in the U.S. or Europe," Mr. Watanabe said. "Bank lendings account for as much as 60% of their financing, which gives banks exceptional influence over corporate activities and means shareholders have a very small voice."
But change is in the wind. The association has attracted more than 270 members, including many entrepreneurial startups, that are very enthusiastic about responding to shareholder concerns. "Right now the biggest companies are still reluctant to change their attitudes, but Japan's financial Big Bang and a more international shareholder base will gradually force them to accept concepts like disclosure," Ms. Sato said.
Two other factors likely to open the door wider to corporate governance are a breakdown of cross-shareholdings among Japanese companies and the likely introduction of defined contribution pension schemes, said Nobuyuki Uwamori of Curuby & Co., Tokyo. "Foreign asset managers will insist on more effective corporate governance as they tap into Japan's huge pension fund market through defined contribution plans, and this will coincide with the increasing disintegration of cross-shareholdings."
Certainly, pressure from across the sea is increasing. According to the Nihon Keizai Shimbun newspaper, as of the end of March, nine foreign trust banks had increased their combined total of assets managed for Japanese employee pension funds and tax-qualified pension plans to 1.57 trillion yen ($10.8 billion) -- 2.2 times the year-earlier level. Overseas trust banks dominated growth in combined assets of investment-trust funds as of the end of May, with 3.35 trillion yen, ($23.1 billion) an increase of 86.4% on the year.
Observers are almost unanimous in viewing the mammoth cross-shareholdings of Japan Inc. as, in the words of Goldman Sachs' Mr. Kono, "an impediment to efficient corporate management, deterring equity owners from expressing views and suppressing corporate governance."
Mr. Miki of Jardine Fleming explained: "Owning huge blocks of stock is viewed as a business cost by Japanese firms; it's not done for investment return but rather to obtain business from other companies. In such an arrangement between a life insurer and an electronics manufacturer, for example, the insurer will buy all its information technology equipment from the manufacturer, who will in turn steer the business of its employee coverage to the insurer. It's a basic conflict of interest that stymies each company from exercising proxy rights."
Such ties are breaking down, however. Jardine Fleming estimates cross-shareholdings account for 50% to 65% of corporate equity in Japan, but that the level is falling about 1% per year.
"Things will probably settle at about 30% to 40%," Mr. Miki said.
What remains to be seen is whether a loosening of interlocking corporate ties, pressure from foreign assets managers and the urgent need of Japanese pension plans for higher returns will be sufficient to breathe fresh air into Tokyo boardrooms.
