Drew Edwards, portfolio manager at investment firm Advisory Research in Chicago and a Japan specialist, was surprised recently by a couple of phone calls from Japan. In all the years that he’s been investing in Japanese companies, Edwards has never received a call from company management, he said, but it’s quite likely that he may be called up again, because of the many changes that are taking root in Japan’s corporate sector.
Those changes are part of efforts underway in Japan to reform the corporate governance code and make companies more open and transparent to investors, the goal being to attract greater investment, local as well as foreign, and improve on a what is a relatively low return on equity (ROE) rate.
“There is tangible evidence that unprecedented things are happening in Japan,” Edwards said.
Investors such as Venk Lal, director of investment risk and strategy for Everkey Global, which manages the Wells Fargo Advantage International Equity Fund, believe that these and other changes are largely responsible for the stellar performance of Japan’s stock market. Last week, Tokyo stocks closed at a 15-year high Wednesday, on the back of strong economic data and GDP growth, but corporate profits are also at an all-time high, and that’s because of the changes taking place in corporate governance, Lal said.
“There are a number of things taking place that are positive and bode well for the long-term—the focus on shareholders through corporate governance and stewardship codes are helping, as well as the real focus on ROE improvement and on boosting dividend payoffs, which increased by approximately 60% last year,” Lal said.
One of the management teams that called Edwards was keen to find out about his fund’s policy on voting proxies. A new rule in Japan states that any company management team that doesn’t generate a 5% ROE for five years should be voted out, he said, “and my guess is management was contacting us to say ‘don’t cut us out, listen to us.’ This is all new but for fundamental investors like us, it’s very important, because we’ve been pounding the table on these issues for decades.”