It appears that even in Japan, we are seeing a rapid rise in social interest in corporate governance of late. As I am involved in the practical affairs of pension fund management, I would like to convey some of my views regarding corporate governance in Japan gained through our everyday experiences dealing with such issues as the exercising of shareholders' voting rights.
First, I would like to touch upon how I see corporate governance in Japan as having changed with the times.
The structure of cross-shareholding by main creditor banks and group firms, which has been a major characteristic of Japan's corporate governance structure throughout the postwar era, is beginning to collapse as the result of the rise of global capitalism. Meanwhile, Japan's labor unions are becoming considerably weaker, and we are rapidly losing the opportunities and mechanisms by which corporate management has been kept in check. I believe that these realities, coupled with the extended duration and seriousness of the current slump in the general economy and stock prices, are behind the heightened debate over corporate governance.
In the first place, there is no set form regarding the specifics of corporate governance that are applicable to every time and every place. Frankly, I believe that each country must devise a corporate governance regime that best fits it, based on such factors as the environment of the times and differences in culture in the broad sense of the word. As such, I believe that Japan must now seriously ponder such questions as how to set up a workable system to check corporate management that fits these times and what sort of corporate governance practices are needed to achieve this goal, and then work to make it fit into the social system. Such moves have already begun to take shape, as can be seen in the revision earlier this year of the Commercial Code to allow major companies to set up board systems in which they will be able to create committees whose majority are formed by non-executive directors, and this shows that we are already moving from the abstract discussion stage to the specific implementation stage.
Second, let me explain the basic position that pension funds take regarding this issue.
The aim of pension fund management is to secure funds so that pension benefits are kept stable into the future. It is needless to say that the foundations of a pension system's existence, whether it be public or corporate, lie in the economy of the home country. It is true that if we look at such figures as the protracted slump in domestic stock prices since the 1990s and the low ROE compared to that of Western countries, we should be asking ourselves whether there is any meaning to investing in domestic stocks. However, when we give thought to the real aim of pension fund management, our basic position should be that even if a certain amount of overseas investment is necessary from the viewpoint of risk diversification, in the end we should be long-term investors with our pivot on domestic investment, securing profits through investments in stocks of mainly domestic companies and reflecting those gains in pension benefits. As long-term investors, I believe it is the most basic stance and social responsibility of pension funds to appropriately exercise their rights as shareholders and thus function as a means by which to keep corporate management in check as one of the players in a capitalist society.
To bring up one specific example, the entity to which I belong, the Pension Fund Association (a nationwide organization comprising some 1,700 pension corporate funds), has been indirectly exercising its shareholders' rights since fiscal 1999 through investment institutions. In addition, we plan to start directly exercising our rights in earnest in line with the start of in-house investment (indexing) from fiscal 2003, and we are also looking into the possibility of utilizing other means of effective corporate governance. Furthermore, on the domestic front over the past one or two years, we have begun to see more positive action regarding corporate governance centering on the exercise of shareholder voting rights. The Government Pension Investment Fund, which is one of the largest funds in the world, has announced its plans to exercise shareholder rights through investment institutions, and large and powerful civil servant pension funds such as the Pension Fund Association for Local Government Officials are actually doing so. The existence of pension funds as a long-term investor is also gradually gaining social recognition.
Progress on this issue is, in the end, up to the specific measures taken by the parties concerned, but I believe that we will see unexpectedly swift progress as players such as large-scale pension funds accumulate experience through the process of trial-and-error. Various problems will likely crop up during this process, but what we pension funds must not forget as long-term investors is the importance of accurately ascertaining the difference between corporate management that sacrifices investment for future growth due to the excessive prioritization of short-term goals such as "share prices" in the name of putting "shareholders" first, and sound corporate management that seeks to increase corporate value and shareholder value in the mid- to long-term, and the importance of ensuring that appropriate funds flow to the latter through the market. Even as I say this, I also believe that this differentiation will not be easy.
To close, I would like to present some miscellaneous thoughts.
The slump in both the economy and stock prices has continued for a protracted period of time, and it is becoming increasingly severe. Amid such an environment of extreme change, in which the Japanese economy, admired worldwide in the 1980s, has come to be called the factor behind the instability of the global economy, and the opacity regarding the future, I sense the prevalence of pessimism in Japan. However, as I hold discussions with staffers on such occasions as internal debates on the exercising of shareholders' voting rights, I see that on an individual company basis, there are in fact many firms that are showing great improvement in their constitution through serious restructuring efforts, and that there is no need to be pessimistic regarding the potential of the companies that form the backbone of the Japanese economy. While it is a fact that monetary and economic policies must be properly implemented on the macroeconomic front so that we pull out of deflation and the financial system becomes sound again, and that the country still has serious problems to tackle such as the expected population decrease, it may well be that when we look back on this period, we will see that we were quite close to the end of the tunnel. And at the same time I have a feeling that the creation of corporate governance functions that keep corporate management in check in a healthy way will provide an important opportunity for the Japanese economy to get out of this long, dark tunnel.
December 18,2002
