GPIF finds gaps in manager engagement with Japanese corporates

Japan’s 245.98 trillion yen ($1.5 trillion) Government Pension Investment Fund’s (GPIF) annual survey of listed companies designed to ascertain the stewardship activities of its external asset managers, reveals engagement in Japan remains an uphill struggle.

The survey seeks to gauge the degree of “purposeful and constructive dialogue” between listed companies on the Tokyo Stock Exchange and asset managers, offering a window into the ability of institutional investors to effect change in corporate Japan.

Only 717 firms (33 per cent) of the 2,154 listed companies on the Tokyo Stock Exchange responded to GPIF’s survey request.

Engaging on governance

Since the introduction of Japan’s Corporate Governance Code in 2015 the country has been trying to modernize corporate boards, long dominated by in-house executives. Outside directors currently occupy 44 per cent of the board seats of companies listed on the Tokyo Stock Exchange’s Prime section, up from 28 per cent in 2017, according to a data compiled by the Japan Association of Corporate Directors.

Still, 70 per cent of respondents said they did not receive a request from asset managers to conduct dialogue with outside directors and outside statutory auditors.

The Tokyo Stock Exchange, leading calls for stronger governance, is also demanding listed companies take “Action to Implement Management that is Conscious of Cost of Capital and Stock Price.” This new regulatory pressure is designed to improve underperforming companies, lift valuations and improve capital efficiency.

Although regulatory pressure was cited amongst corporate respondents as a focus of engagement activity alongside climate – only 10 per cent of companies said that they had received a request from their asset managers in the past year to conduct collaborative engagement.

Lacklustre asset manager engagement with investee companies comes as GPIF seeks to widen its manager pool.

The process will see the fund open up to new managers by reviewing criteria that have long-governed selection. Like its stipulation that its managers must have at least 100 billion yen assets under management and a fixed number of years of experience servicing financial products. The fund now says it will accept applications from investment management institutions with “a sufficient track record.”

Disclosure impRoves

Encouragingly, asset manager pressure on companies to disclose in line with Task Force on Climate-related Financial Disclosures (TCFD) recommendation is reaping change. Approximately 90 per cent of respondents voluntarily disclose non-financial information in line TCFD recommendation.

Still, asset manager engagement regarding Task Force on Nature-related Financial Disclosures (TNFD) is much less with only 35 companies responding that they have disclosed information in line with the TNFD – 79 per cent of respondents said they had no engagement from asset managers on TNFD.

Despite challenges around engagement, corporate responses highlight the effectiveness of engagement.

“They [asset managers] understand our company deeply and their advice through engagement is helpful. Many investors tend to hesitate in expressing their opinions to management, but asset managers give harsh opinions directly to the President and CFO. Therefore, the meeting is very beneficial in the sense that management can hear the voices of investors directly. For this reason, they have won deep trust from our CFO,” wrote one survey respondent.

“In particular, they explained frankly their way of thinking behind their ESG analysis and evaluation of our company, which helped us understand the “investor perspective.” We had a frank exchange of views on sustainability. Especially on materiality, we were able to obtain opinions on what institutional investors want,” said another.

Other corporate responses flagged continued short-termism among asset managers.

GPIF runs a policy asset mix of 25 per cent each in domestic and foreign equities, and domestic and foreign fixed income and targets a real investment return  of 1.7 per cent with minimal risks. Investment in alternatives, began 10 years ago, remains under a 5 per cent target at just 1.4 per cent of total AUM. The GPIF has been discussing changes to investment strategy, including its asset mix and will announce a new investment policy at the end of this year to enact through 2025.

The rally in global markets powered record returns at the investor, according to its annual results. Domestic equities are the fund’s best performing investment although the weakening yen lowered GPIF’s asset size in dollar terms to $1.53 trillion compared to Norway’s $1.6 trillion fund. The fund posted a 22.7 per cent annual return for the financial year ending March 31st.