Corporate Japan under the microscope

As Japan Inc enters the crunch AGM voting season, when virtually all companies meet over a two-week period, F&C will be voting at some 350 meetings.

According to Karina Litvack, F&C's Head of Governance and Sustainable Investment, over the past five years of active voting and dialogue, there have been some signs of positive change, in particular on pensions, where a number of companies have started to replace traditional retirement bonuses with more modern pension arrangements, in line with F&C recommendations. Nevertheless, Litvack has voiced concerns that despite these improvements, corporate governance in Japan on the whole still lags global best practice -and that this would be reflected in F&C's voting activity this year.

"Many of the problems stem from a lack of independence on Japanese boards," says Litvack. "This translates into a potential misalignment of management and shareholder interests, as power lies concentrated with executives in the absence of necessary checks and balances. F&C will therefore continue to press for more effective boards by opposing the election of directors at boards without independent directors as well as those boards that are overly large. Equally we are strongly encouraging companies to establish a three-committee structure, including independent audit and remuneration committees. Where companies have failed to put such structures in place and still have statutory auditor boards, we will call for a majority of members of these boards to be independent," she added.

Litvack said that F&C was wary of granting too much discretion to boards with a lack of independent oversight.

"We categorically oppose any amendment to articles giving the board the authority to decide on share issuance and dividend payments without prior consultation of shareholders. Likewise, F&C applies particular scrutiny to "poison pills" , and will vote against those that leave management with the ability to protect their vested interests in a take-over scenario.

"Japan's outdated corporate governance standards hurt shareholders, and also present a real threat to the country's future competitiveness at a time when the government is intent on reform. In too many cases, shareholder and management interests are not aligned and despite the rhetoric, companies continue to resist calls for more modern board structures. F&C will use its votes wherever necessary to impress on investee companies the need to provide greater accountability and transparency to their shareholders," she concluded.