Japanese companies are working to improve corporate governance, but there are “significant differentials” across firms and industries, according to Sustainalytics, an Amsterdam-based independent corporate governance research firm.
It recently assessed 450 Japanese companies using a composite metric that looks at four corporate governance indicators: board gender diversity, long-term incentive plans, board independence, and board experience.
Only four earned a perfect score, namely: Shiseido Co Ltd, Hitachi Ltd, Bridgestone Corp, and Hoya Corp.
At the other end of the spectrum, 132 companies scored zero, and may be poorly positioned to adapt to tightening corporate governance standards in Japan, according to the research firm.
“While Japanese companies, as a whole, trail global best practices in corporate governance, the corporate governance adaptability metric identifies important differences among Japanese firms”, Sustainalytics says in a report released on April 24.
By industry, it found that diversified financials were the best prepared to adapt to Japan’s tightening corporate environment, followed closely by banks. The auto components industry was the laggard amongst the 12 industries that were scored, and “may struggle to adapt to shifting governance norms”, according to the firm.
“For investors taking concentrated sector bets within Japanese equities, this information can help inform target sector weights”, Sustainalytics says.
Its findings indicate that Japanese firms perform relatively well on board experience and gender diversify. Some 43% of the 450 companies have boards that include at least one non-executive director with relevant industry experience, and one-third have at least one woman on their boards.
However, the research firm says board independence is an ongoing struggle, as only 23 out of the 450 companies, or 5%, have a board that is majority independent.
“Most Japanese boards are a long way from majority independence”, it says.
Overall, Sustainalytics says investors’ expectations regarding the corporate governance performance of Japanese firms are rising.
“The Japan’s Stewardship Code, a key aspect of Japan’s corporate governance initiative, has gained slow but steady momentum, and improved governance is an important part of Japan’s broader stance on structural reform”, it says.
