Japan Markets ViewCorporate Engagement with Shareholders of Growing Importance

 

[QUICK Market Eyes] The importance of corporate engagement (dialogue) with investors is gradually increasing in Japan. Beginning in March 2023, the Tokyo Stock Exchange (TSE) has required companies listed on the Prime Market to disclose the status of dialogue between their management and shareholders. On July 5, the Government Pension Investment Fund (GPIF), also known as the “whale” due to its large size, released its Annual Report for FY 2023. The report also reveals the asset owner’s intention to deepen its engagement.

 

The GPIF recorded an investment surplus of JPY45.4153 tn in FY 2023. The Annual Report detailed the investment results and the GPIF’s role. Naoaki Ieiri, Senior Strategist at Daiwa Securities, pointed out, “Equity active management has become more sophisticated.” He evaluated the increase in new active fund adoption and excess returns from active management.

 

This year’s annual report incorporated a section on “Dialogue in the Management of Equity Active Funds,” perhaps for the first time since its first edition, as Mr.Ieiri pointed out. In this section, the GPIF has indicated its intention to promote the understanding of the status of active fund managers’ engagement and to conduct objective survey analysis. Mr. Ieiri said, “This indicates the GPIF’s awareness of the issues.” He considers that how to utilize engagement in the investment management process will become more important.

 

The GPIF states that it “emphasizes ‘constructive dialogue’ (engagement) between investment trustees and the companies and issuers in which they invest, taking into account ESG issues, which are non-financial factors.” In the period January-December 2023, GPIF-commissioned Japanese equity managers conducted dialogue with 924 companies. This represents 40% of the GPIF’s holdings of Japanese equities or 94% in terms of market capitalization. The Annual Report also notes that “dialogue with outside directors has increased, particularly over the past year.”

 

Makoto Furukawa, Quantitative Strategist at Morgan Stanley MUFG Securities, analyzed that “GPIF, as a passive investor, may have judged that engagement will also strengthen its functions.” Mr. Furukawa also noted, “GPIF prides itself on being a leader in asset ownership reforms promoted by the government.” He expects the GPIF to gradually deepen its engagement.

 

Furthermore, one market insider pointed out, “The new plan for the Tokyo Stock Price Index (TOPIX) revisions announced by the Japan Exchange Group (JPX, 8697) in June takes the GPIF into account.” JPX Group’s JPX Market Innovation & Research (JPXI) estimates that the number of TOPIX constituents after the revision will be 1,200. Meanwhile, some estimate that the number will be reduced to around 1,000 given the current market environment. This is in line with the status of the GPIF’s dialogue.

 

Some of the shareholders’ meetings, which peaked in June, saw a decline in the percentage of votes in favor of company proposals. Shareholders took a hard look at capital efficiency, and activist investors made a number of shareholder proposals. Chizuru Morishita, a researcher at NLI Research Institute, stated, “I have high expectations for the possibility that corporate changes, such as stronger engagement, may enhance the valuation of Japanese equities.” Japanese companies are often said to “behave like sheep.” In this context, it is difficult to see in the short term whether companies are making significant changes through dialogue. Therefore, we need to check such changes over the long term.

 
(Reported on July 10)

 

 

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