Institutional investors squeeze Japan's insular boardrooms to open up

Nikkei -- Jun 05

With Japan's annual shareholders meetings season coming up later this month, institutional investors are ramping up pressure on companies to appoint more and better external directors who can improve corporate governance.

Japanese companies often promote their board members from within, which can undermine governance and weigh down earnings by preventing them from realizing their full potential. Investors will force them to bring in more independent voices by vowing to reject unsuitable appointments at shareholders meetings.

Pictet Asset Management (Japan) will reject the top executive's appointment at companies where external directors make up less than a third of the board. Sumitomo Mitsui Trust Asset Management will vote against an entire slate of directors unless the one-third threshold is met but is granting a one-year grace period to companies with satisfactory return on equity. Their threshold only applies to companies with nominating or auditory committees, most of which are larger corporations.

Similarly, Mitsubishi UFJ Trust and Banking plans to urge companies to name at least three external directors on a board of 15 or more. It will vote down entire boards starting in April 2020, unless external directors make up one-third of the total.

JPMorgan Asset Management (Japan) has added new language to its voting guidelines stipulating that it would be ideal for external directors to make up the majority of corporate boards in the future.

These investors are pushing for more stringent standards than those in the Tokyo Stock Exchange's Corporate Governance Code. That document, updated in 2018, says only that "if a company believes it needs to appoint at least one-third of directors as independent directors based on a broad consideration of factors," it should do so.

Others are focusing more on the quality of external directors. U.S.-based BlackRock opposes the reappointment of external directors who attend less than 75% of board meetings, unless they provide a satisfactory explanation.