A pessimistic view of Japanese corporate governance reforms was heard by prominent Australian institutional investors last night at the CFA Market Forecast dinner in Melbourne.

Charles Yang, chief investment officer of T&D Asset Management and past chair of the CFA Institute Board of Governors, gave his assessment of the stewardship and corporate governance codes launched in June as part of the “third arrow” in Abenomics, the economic and fiscal reforms named after current Prime Minister Shinzo Abe.

The first two arrows focused on monetary policy and fiscal policy, but Yang noted that the third arrow – the structural reforms to revitalise Japan Inc – could prove the most challenging.

The stewardship code establishes basic practices and reiterates fund managers’ fiduciary duties to clients.

“What it comes down to is engaging with the companies you invest in, making sure that as an asset manager you are able to fulfil your fiduciary duties – something that as a charter holder I hope you know all about,” said Yang. “This is something that is still relatively new in Japan. It’s all about engagement. But there isn’t even a Japanese equivalent to engage, so they use the word engagemento.”

Yang noted that engagement is a skill, in the way that risk management is a skill, and that many asset managers would find this process of engaging with invested companies to be trial and error.

The corporate governance code turns to establishing best practice in the way that companies behave with regards to operations and communications. The rules address shareholder rights, cross-shareholdings, anti-takeover measures, whistleblowing, board diversity and profitability.

Here Yang pointed to the unfortunate timing of the recent scandal over Toshiba Inc’s overstating of revenue.

Boards are strongly advised to have at least two independent directors on boards, with a comply-or-explain standard in place. Companies are expected to adhere to this standard by the end of December 2015, Yang said, and many companies do intend to adhere.

He also said that the goal of good corporate governance practice will take time to roll out, particularly in increasing diversity on boards.

He said only 10.5 per cent of companies have a female director, equating to only 1.5 per cent female directors across all companies.

“If you were forecasting on this topic, asking a question about the number of female directors on companies next year, I might say this would rise 1.51 per cent. … This is quite a challenge,” said Yang

After his remarks, there were a variety of questions from the audience, including representatives from AustralianSuper, Vanguard, Telstra Super, Franklin Templeton, Warakirri Asset Management and Latrobe University.

Rachel Alembakis has more than a decade of experience writing about institutional investments, asset owners, custody and administration for a variety of publications.
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