TOKYO - Japan's Pension Fund Association will adopt strict proxy voting guidelines in April to penalize corporate managements that don't uphold shareholder value.
The Pension Fund Association, a pooled fund which represents about 1,700 employee pension funds and has assets of 5.3 trillion yen ($45.2 billion), will vote against re-election of top management and directors and the payout of their retirement allowances if a company has suffered three straight years of losses with no dividend payouts.
"The PFA invests a third of its assets in domestic stocks," said Katsumi Shimizu, an official with the PFA. "Since we started managing some domestic stocks in-house last year, we decided to establish our standards of voting rights.
"As in the past, we have been requesting trust banks and asset management companies to vote their shareholdings in the right way," to achieve better corporate governance, Mr. Shimizu said.
Marc Goldstein, director of research for Institutional Shareholder Services in Tokyo, believes the PFA's new guidelines will have an impact on corporate governance in Japan.
"The degree of influence, and that of independent shareholders in general, naturally differs tremendously from company to company," he said. However, he added "as domestic and foreign pension funds and other institutional investors gradually replace lenders and business partners as major shareholders of Japanese companies, the degree of influence of those portfolio investors is increasing."
Mr. Shimizu said the PFA plans to continue to have contact with asset management companies, other Japanese pension plans and large institutional shareholders to encourage them to follow the PFA guidelines. He added the PFA will not force other investors to follow its standards and expects them to develop their own rules for voting their shareholdings. However, the PFA hopes that by showing its standards to money managers, it will influence their shareholder voting policies and behavior.
Mr. Goldstein said the PFA is pressuring its member pension funds to develop their own voting guidelines, which has caused many of the asset management companies that actually manage those pension assets to come to ISS to develop custom voting policies for Japanese equities.
"There is no question that active voting by Japanese investors is on the increase," he said.
There are a number of key points on which the PFA's voting guidelines are substantially similar to those of ISS and the custom policies of ISS clients in Japan and overseas, according to Mr. Goldstein.
One example of this, he said, is the opposition to the payment of retirement bonuses to outside directors, because such benefits, which usually are determined by fellow directors rather than by a compensation committee, have the potential to weaken the independence of the outsiders. Another example is the opposition to stock option plans that are not deemed to be in the best interest of shareholders. A third example is a focus on the independence of candidates for outside director positions, particularly at companies that adopt the new, "U.S.-style" board of directors with audit, compensation and nominating committees, Mr. Goldstein said.
May carry weight
"The PFA's announcement that it will oppose re-election of directors at companies which have posted losses for three years in a row does indeed have the potential to lead to changes in management, either because the directors in question are voted out, or because they `get the message' and decide to step down voluntarily," said Mr. Goldstein.
However, he added that he still expects such cases to be rare. "For one thing, few foreign investors would own shares in such companies by the third year of red ink; meaning that domestic pension funds will be fighting a lonely battle," said Mr. Goldstein.
"Active proxy voting is not a panacea for the ills of the Japanese stock market, but I believe it can have a positive impact," he said. "One reason for the low valuations of many Japanese companies is without question the perception that shareholder value is not their highest priority," Mr. Goldstein added.
"The goal of proxy voting is to ensure that companies focus on the interests of their shareholders, and that should increase the attractiveness of those shares and therefore their price," he said.
"Japan is not going to return to the economic growth rates seen in the 1980s and before, and the Nikkei average is not going to return to the 39,000 level. But it certainly has room to improve from the 8000 level," said Mr. Goldstein. "Proxy voting, and an emphasis on good governance generally, is one tool to bring about such an improvement."