The Logic and Limits of Stewardship Codes: The Case of Japan
A stewardship code is a set of principles on how institutional investors should act as shareholders of companies in which they invest. Since the first such code was adopted by the Financial Reporting Council of the United Kingdom (UK) in July 2010, a significant number of countries, including Japan, have followed the lead of the UK in adopting their own stewardship codes (the latest version of the Japanese Code is available in English here). Although the contents of these codes are not identical, they generally are non-mandatory ‘comply or explain’ rules urging institutional investors to engage more actively with their investee companies by exercising their rights as shareholders.
One might find the trend of jurisdictions adopting stewardship codes unsurprising considering the global increase in the ownership stake held by institutional investors in listed companies, and the growing expectation that these investors will play a role in the corporate governance of investee companies (see, eg, OECD, G20/OECD Principles of Corporate Governance, Part III). However, if the goal of adopting stewardship codes is to promote better corporate governance in investee companies, then this uniform approach is rather puzzling since it is widely acknowledged that different countries have different share-ownership structures and often face different corporate governance challenges. It may well be the case that the true intention behind adopting a stewardship code is highly contextual and contingent on jurisdiction-specific factors.
In my recent paper, ‘The Logic and Limits of Stewardship Codes: The Case of Japan’, I have investigated the true intention behind the adoption of stewardship codes in the UK and Japan by analyzing not only the text of their principles and guidance, but also the contexts in which they were adopted. The main finding of this investigation is that there is a divergence between the basic goals and orientation of the Japanese Stewardship Code and of the UK Stewardship Code, which has been largely overlooked in the literature.
The term ‘stewardship’ suggests that stewardship codes are premised on the logic of fiduciary duties, which compel fiduciaries to forsake their own interests and act in the interests of their beneficiaries; however, the goal of the UK Code is different. Indeed, the principles of the 2012 UK Code start with the phrase: ‘So as to protect and enhance the value that accrues to the ultimate beneficiary’. However, it is clear from the Walker Review, which proposed the adoption of a stewardship code in the wake of the Global Financial Crisis, that the UK Code’s goal is rather to restrain excessive risk-taking and short-termism by making institutional investors more responsible to the public.
In contrast, the Japanese Stewardship Code was adopted as part of corporate governance reforms of the current Abe administration that champion shareholders’ interest as a key to ‘revitalize’ the Japanese economy (other reforms are discussed elsewhere). In particular, the Japanese Code aims to change the behavior of domestic institutional investors to exert pressure on entrenched management as actively as foreign institutional investors. This goal of the Japanese Code is more compatible with the (fiduciary) logic of stewardship than that of the UK Code, although the former still focuses on the corporate governance of Japanese companies rather than the interest of Japanese ultimate beneficiaries.
If stewardship codes have different goals, this difference must be taken into consideration when assessing their effectiveness. The success of the Japanese Code will primarily depend on how well domestic institutional investors are incentivized to act in the interest of their ultimate beneficiaries and to monitor entrenched management. Conversely, the success of the UK Code will likely depend on the extent it can prompt institutional investors to consider the interest of the public and stakeholders other than shareholders. Regulatory interventions might be necessary, as suggested by Professors Chiu and Katelouzou (at 79–81 of their paper), but for different reasons in the UK and Japan.
Gen Goto is Associate Professor of Law at the University of Tokyo, Graduate Schools for Law and Politics.