GPIF calls for shareholder activism – Japan style
The chief investment officer of Japan’s Government Pension Investment Fund has urged asset managers to engage local companies’ management in a more vigorous debate about corporate governance.
The world’s largest retirement fund started buying more equities in 2014, marking a dramatic policy shift in search of better performance. It recorded a record quarterly gain in its fiscal third quarter which ended in December.
GPIF has been leading the way domestically in terms of raising overseas allocations – it is now looking to set another example by leaning on its asset managers to push for higher returns for Japanese pensioners.
“To me, the difference between engagement and monitoring is stark,” said CIO Hiromichi Mizuno at AsianInvestor’s Japan Forum in Tokyo on Wednesday (March 15). “Instead of just listening, we are requesting that asset managers have a continuous and constructive dialogue with issuers.”
Change in fee strategy
GPIF has traditionally paid wafer-thin fees to its asset managers – but that is changing, said Hiroshi Komori, the fund’s senior director in the stewardship and ESG division.
“GPIF was aiming to pay the lowest fee on this planet, but we’ve completely changed our policy,” he noted. “Experienced researchers are required for engagement, so asset managers will have to train them – we are aware that that is going to incur cost.”
Certainly, concerns over the behaviour – and salaries – of corporate executives are front and centre these days.
Recent events in South Korea – the Samsung scandal and the company's links to the newly ousted president Park Geun-Hye – have underlined the need for better policing of corporate corruption. Meanwhile, the likes of US fund giant BlackRock have been pressing companies to moderate pay rises for their senior management.
To support its own push for stronger corporate governance in Japan, GPIF is also mulling launching an index of domestic companies during the next few months based on their environmental, social and governance (ESG) awareness. It will invest some of its ¥145 trillion ($1.26 trillion) in the top performers.
Prime Minister Shinzo Abe’s administration is doing battle with Japan’s corporate culture of secrecy and hierarchy in the hope of boosting the stock market and consumer confidence.
His team presented a new corporate governance code in 2015, laying down rules on disclosure, shareholders' rights and independent directors. That followed a stewardship code that was introduced in 2014 to push disgruntled investors to speak out against laggard companies.
GPIF has committed to encouraging institutional investors to fulfil their fiduciary responsibilities by promoting medium- to long-term growth of companies through engagement.
“We are promoting corporate governance throughout the investment chain in Japan,” said Mizuno, whom GPIF named as its first CIO in January 2015.
GPIF’s Mizuno speaking on Wednesday
The pension fund is in a unique position in Japan; it is prohibited by law from investing directly in the equity of companies or influencing management. This precludes any conflict of interest with asset managers, which is something other asset owners face, Mizuno said.
Komori told the audience: “We are the largest pension fund for the citizens of Japan, so we have a major responsibility – but we alone have no power to live up to our responsibility. We are dependent on the asset managers as well as issuers, so they must follow the rules laid out for them at full throttle until we are exhausted.”
Japanese asset managers have often been quiescent in the face of low returns and a lack of disclosure by top corporate management. Many are under the umbrella of Japanese banks that make loans to the companies or belong to life insurance companies, which in turn are part of a Japanese keiretsu, or family group.
Research by asset manager Hermes shows that Japan is a major corporate governance outlier globally, scoring significantly lower than the other main regions, including the rest of Asia Pacific (see chart below).
Japan lags in governance
GPIF said on Monday it had started inviting pitches for investment mandates designed to strengthen its stewardship activities, starting with a call for passive managers of domestic equities.
Under the terms of the tender process, the fund said it would comprehensively review asset managers’ business models, including their investment process, stewardship activity policy, organisation and fee structure.
Two people familiar with the matter said GPIF had hired consultant Mercer to help it make the mandate choices.
Shareholder activism became a dirty term in Japan during 2007, when US funds such as Steel Partners attacked companies for low returns. Japanese companies such as Bull-Dog Sauce fended them off by rallying support against foreigners.
This time though, it is their own domestic government and investors exerting the pressure.
Engagement "must go both ways"
“When we use the term engagement, it has to go both ways,” said Komori. “It can’t be the asset manager just demanding higher dividends. It must also be the investee company asking ‘What do you think about our management as we compete on the global stage?’.”
Indeed, all the participants in the Japanese investment chain – including asset owners and index providers – should understand the issues around governance, argued Mizuno.
Hence GPIF is looking to build a stronger relationship with other investment industry participants. Last year the fund – along with the California Public Employees’ Retirement System and California State Teachers’ Retirement System – organised a global forum. The first was held in Tokyo and the next one will be in California.
Moreover, said Mizuno, the relationship between GPIF and asset managers is shifting from unilateral monitoring to discussions. “Our teams are hoping to have dialogues with you,” he noted.
“As a responsible person, I have to say I am not sure we can keep up with your professionals,” he added, “but this kind of activity will help to enhance the investment chain.”
Additional reporting by Richard Morrow