QIC Inside Investor Relations Volume 43: A Tribute to Shinzo Abe – The Main Driving Force Behind Japan’s Corporate Governance Reform (Part 1)

On July 14th, 2022, the International Corporate Governance Network (ICGN) hosted the ICGN Japan Forum with the theme of “Implementing Japan’s Corporate Governance Code in Practice: Prioritizing Strategic Human and Natural Capital Management.”

At the beginning of the conference, Kerrie Waring, CEO of ICGN expressed her sorrow and sadness at the tragic death of Shinzo Abe, the former Japanese Prime Minister. “Abe san was instrumental in leading a new era for corporate governance and investor stewardship in Japan, impacting the wider region. His revitalization strategy – otherwise known as Abenomics – led to a series of regulatory initiatives including Japan’s Stewardship Code in 2014, and Corporate Governance Code the following year. It’s incumbent on all of us to carry on his legacy.” 

In 2019, ICGN published a Statement of Japan Corporate Governance Priorities with an updated version to be published on October 4th, 2022. During the meeting, ICGN previewed some of the changes that may occur in the updated document. 

Firstly, ICGN currently sees 80% of all companies listed on the Prime Market of the Japan Exchange Group (JPX) having over 1/3 independence on the Board of Directors. Looking ahead, ICGN recommends that all companies listed on the Prime Market should aim to have at least 1/3 independence. Furthermore, it would be ideal that companies listed on both the Standard Market and Growth Market to meet this requirement and aim to have one half independence on the board. 

Secondly, effective corporate governance is not just about the number of independent directors, but also about the quality. ICGN encourages companies to articulate the reasons for appointing an independent director and how their skills, experiences, and attributes align with the company and whether there is a long-term plan and a succession strategy. 

Lastly, ICGN recommends that companies express their commitment to board diversity, equity, and inclusion (DE&I) with clear policies, plans and measurable, time-bound targets. 

Human Capital Management: The Priority of “S” in ESG 

This session had two main themes, but we’ll mainly focus on the first one: Social Priorities – How to Strengthen the Company’s Most Valuable Asset. A representative for Vanguard highlighted that human capital risk is critical to a company’s long-term success, of which the board plays the most critical role. We expect the board to oversee and identify risks to its strategy and long-term shareholder value. We encourage boards to periodically review human capital risks and have management provide information on how human capital-related issues are managed and confirm that the actions align with the company’s long-term goals. 

The Corporate governance Director of Morrow Sodali – the world’s leading strategic advisor and shareholder services provider – also made a statement about the trend of corporate governance in Japan and the APAC region. They often see companies in Asia wait for relevant regulations to take effect before taking action. However, in the US, Europe, and Australia, companies have begun to voluntarily disclosing more information. They emphasized that the regulator is only one of the stakeholders, and companies need to also respond to other stakeholders – including investors, employees, and customers. The requirements set by the regulator may not always meet the expectations and standards of investors, and if companies don’t respond to the issues that the employees care about, they may not be able to hire and retain the best talent. Furthermore, Asian companies at large often ignore the fact that customers are also one of the stakeholders. If a company has reputation problems related to employees, customers may not choose the company’s products and or services. Therefore, it is critical for companies to voluntarily disclose more information than the needs of regulatory requirements. 

Focus on Gender Diversity 

When it comes to human capital, Vanguard’s focus in Japan is diversity. Regarding board diversity, they believe that diverse boards make better decisions, and good decisions lead to better long-term outcomes for shareholders. Vanguard’s emphasis on board diversity has been reflected in its voting policy in Japan – it will vote against director candidates if the company makes no progress in advancing board diversity or if the board does not include at least one female director. 

Vanguard pointed out that one common theme they hear from Japanese companies regarding the lack of gender diversity on the board is that it is hard to find female candidates. However, women make up 40% of the Japanese workforce – higher than the global average. Therefore, when companies discuss increasing board diversity, they must ask themselves these basic questions: What is the process and criteria for appointing a director? Are there any criteria that make it impossible for a candidate list to be gender-diverse? For example, companies require director candidates to have experience as a CEO, but because not many women have the relevant experience, companies are unlikely to get a large number of female candidates. 

In Australia, more and more institutional investors and stakeholders are pushing for the 40:40 Vision – the goal of reaching 40% male, 40% female, and 20% flexible on the board of directors and management level. And in Europe, we’re seeing some legal frameworks that mandate the representation of women on the board, management, or the organization as a whole. 

Implementing Board Diversity

Vanguard pointed out that as investors, when they look at the board composition, they want to know what skills are needed to help oversee a company’s long-term business strategy. For example, if a European company has a growing market in China, but no one on the board has relevant market experience. Or Japanese companies with worldwide operations but lacking international perspective on the board of directors. Companies should ensure they have enough diverse perspective on the board that aligns with their business development strategies and future expansion targets. Gender is the most important and often the most intuitive when we are talking about diversity. However, we would like to see less groupthink in the boardroom and at the management level, and there is no right answer when it comes to confronting and managing different issues. The ultimate goal that companies should aim for is the diversity of ideas, skills, and experiences throughout the ranks of the organization. 

In part 2 of the article, we will discuss the second theme of the ICGN Japan conference: Environmental – Moving from Words to Actions. 

Companies need to be well-prepared for the rise of sustainable investing by providing better disclosure of ESG information, increasing awareness and participation of the board of directors and management team, and improving communication with institutional investors. QIC has worked with many listed companies in Taiwan on improving their ESG communication and on attracting long-term focused investors. If you are looking for guidance in developing a successful ESG strategy, please reach out to us. 

Contact: yvonnehuang@qtumic.com