Evolving Perceptions of Corporate Governance in Japan

History provides us with insights that help us better understand how the market behaves. IHS Markit's Analytics team and Perception Research team recently completed an in-depth study of the investment landscape in Japan, and the results show that while the investors are certain there is potential, issuers in Japan still have room to improve. As part of this research, IHS Markit interviewed a cross section of institutional investors to gauge market sentiment and better understand the reasons behind investment decisions and the issues that investors consider most pressing.

Japan's recent economic history often is characterized by investors outside of Japan with the words struggle, underperformance, and stagnation. With the bursting of the real estate bubble and the asset bubble in 1990s, Japan endured what has come to be known as the "Lost Decade". With the Nikkei 225 index still below its December 1989 peak, it is arguable that Japan has yet to fully recover despite the authorities' various attempts to implement policies designed to break the country out of its economic malaise. The most recent attempts to reignite Japan's economy have been led by Prime Minister Shinzō Abe with the introduction of policies, known collectively as Abenomics, focused on creating accommodative monetary conditions, utilizing fiscal potential, and perhaps most interestingly, implementing significant structural reforms. Whilst the remit for structural changes was broad, there was a particular emphasis placed on changing corporate governance practices in Japan. With the creation of the Japanese Stewardship Code and Corporate Governance Code in 2014 and 2015, respectively, Abenomics highlighted the importance of reforming how companies are managed to Japan's long-term economic prosperity.

The study conducted showed that the vast majority of the investment community viewed this paradigm shift very positively, welcoming an increased focus on shareholder value creation, encouragement of efficient capital allocation, the bolstering of engagement between issuers and investors, and most recently, the increased focus on ESG integration. The hope was that these initiatives would materially change the way Japanese corporates thought about their responsibilities to their various stakeholders and the priorities given to these competing interests. Yet, there was also concern that any real change would be hard won with existing behaviors being deep-rooted and the fact that the Codes are not mandatory and ultimately nonbinding. The success of these programs instead relies on the comply or explain principle, with issuers choosing to engage and the hope that the pressure of market forces will be sufficient to drive uptake and force companies to adhere to the principles laid out through fear of being left behind.

The study also revealed that whilst investors are most attracted to Japan because of compelling valuations and the potential to exploit mispricing in the market, outside of this, it is the increasing focus given to delivering shareholder returns and ensuring robust corporate governance practices that is drawing in global capital. Respondents specifically highlight the improvements they are seeing in the way that Japanese management teams interact with the market and how best-in-class companies are showing tangible progress in overcoming the tendencies that have historically plagued Japan's corporate culture.

When discussing the major risks still present in the market, despite investors recognizing that significant macroeconomic risks remain with slowing global growth, increasing protectionism, and currency volatility, they are also aware of the uncertainty around whether Japanese issuers are truly committed to reforming their practices. They question whether companies will comply with both the letter and spirit of the Corporate Governance Codes as the Stewardship Codes are for the investment community. The investment community encourages Japanese businesses to increase their communications with investors and engage on ESG matters as well as the corporate governance reform. With the increased requirements on ESG and corporate governance related market requirements, IHS Markit's ESG and Corporate Governance team can advise Japanese issuers to adhere to regulatory and international best-practice standards. The services vary from assessing ESG sensitivities of institutional investors, identify corporate governance risks before general meetings, and create opportunities to engage with capital market stakeholders to assess new pools of capital to widen and reduce volatility.

To access the full landscape study on Japan, including an in-depth ownership analysis and perception sentiment, please click here.

For more information on our ESG and corporate governance services, please contact Kazuhiko.Tahara@ihsmarkit.com, or to speak with our perception experts, please contact Alex.Dawson@ihsmarkit.com.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.