Improvements to corporate governance in Japan have been particularly noticeable in recent years, with revisions to stewardship and other codes the latest examples of internal pressure.
Money management executives also highlighted the importance of former Prime Minister Shinzo Abe's push for structural reforms in 2012 through his "three arrows" economic policy.
"The government's prioritizing of corporate sector reform — a policy pursued with equal vigor by new Prime Minister Yoshihide Suga — has been an important influence in boosting Japanese corporate profitability and performance, as well as returns for investors," said Archibald Ciganer, Tokyo-based portfolio manager of T. Rowe Price Group Inc.'s Japan equity strategy, in an email. "For several years now, we have been highlighting the concepts of best practice, robust ESG disclosure, and improved stakeholder engagement because they are central to long-term sustainability."
Mr. Ciganer said governance standards and returns for investors are rapidly improving, "closing the gap with Europe and U.S. equity markets." Improvements include more efficient allocation of capital by Japanese companies, the payment of higher dividends and increasing share buybacks.
But concerns remain for those investing in Japan, namely the representation of women at the management level, the size of corporate boards and the structure of board committees.
"We ask companies to address the source of the issue — most Japanese companies have a serious shortage of female representation at manager level," said Kei Okamura, director of Japan investment stewardship at Neuberger Berman Group LLC in Tokyo. "This ratio continues to thin as you go up the hierarchy."
The firm pushes companies to have "management commitment to the issues … to support working mothers, to have a proper career development assistance program," Mr. Okamura said — concepts that are pretty normal by Western standards.
Unless there is a target in place for female representation at manager or executive level, not just in the boardroom, "we will be talking about a lack of female directors for the next 10 to 15 years. My daughter will grow up and ask why there are no opportunities for women — and I really don't want to be answering this question 20 years from now," Mr. Okamura said.
On the topic of board sizes, Rob Hardy, corporate governance director at Capital Group in London, said board sizes are coming down from more than 20 at some points in time. "Above 20 is too big to have a meaningful discussion. Ten to 12 feels right," Mr. Hardy said.
And a big issue for some managers and corporations is that directors are still chairing certain committees, at times giving rise to potential conflicts of interest.
"One issue we see is CEOs will often be on the nomination or compensation committee and chair it — I would love to be on my own compensation committee — but there is clearly an issue with (that)," said Chris Vilburn, Tokyo-based head of Asia stewardship at Goldman Sachs Asset Management.
Shizuko Ohmi, head of investment stewardship for Japan at J.P. Morgan Asset Management in Tokyo, agreed that there is a need for a separation of chairmen and CEOs on boards so the same person doesn't hold both titles. "That's still something which should be addressed going forward."
Ms. Ohmi added that, alongside the diversity of gender on boards, there's a need for different nationalities and ages to be addressed, too. "Generation is another … area where diversity is much more deserved," she said.
And while much has been achieved over recent years, money management executives 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, Neuberger's Mr. Okamura said.
"The last two years we've had COVID (to deal with), so as a result the proxy-voting advisers have put a pause on certain guidelines," relating to return on equity, for example. "ROE is a big one. They paused that because of COVID, so (votes against management on that basis) plateaued the last two years. That'll likely be back next year," Mr. Okamura said.
T. Rowe's Mr. Ciganer agreed that the focus on improving corporate governance "will only gather pace, creating both risks and opportunities for companies as they respond to, or fall behind, the pace of change."
Executives also expect environmental concerns to take up more space on proxy-voting agendas.