The Logic and Limits of Stewardship Codes: The Case of Japan

A stewardship code is a set of principles on how institutional investors should act as shareholders of companies in which they invest. Since the first was adopted by the Financial Reporting Council of the United Kingdom in July 2010, a significant number of countries, including Japan, have followed the lead of the United Kingdom in adopting their own stewardship codes. Although the contents of these codes are not identical, they generally are non-mandatory “comply or explain” rules urging institutional investors to engage more actively with their investee companies by exercising their rights as shareholders.

One might find the trend of jurisdictions adopting stewardship codes unsurprising considering the global increase in the ownership stake held by institutional investors in listed companies, and the growing expectation that these investors will play a role in the corporate governance of investee companies. However, if the goal of adopting stewardship codes is to promote better corporate governance in investee companies, then this uniform approach is rather puzzling since it is widely acknowledged that different countries have different share-ownership structures and often face different corporate governance challenges. It may well be the case that the true intention behind adopting a stewardship code could be highly contextual and, contingent on jurisdiction-specific factor.

From such viewpoint, this article investigates the true intention behind the adoption of stewardship codes in the United Kingdom and Japan by analyzing not only the text of their principles and guidance, but also the contexts in which they were adopted. The main finding is that there is a divergence between the basic goals and orientation of the Japanese and the UK Stewardship Codes that has been largely overlooked in the literature. Although the term “stewardship” suggests that stewardship codes are premised on the logic of fiduciary duties, which compels a fiduciary to forsake its own self-interest and act in the interest of its beneficiary, the goal of the UK Stewardship Code is different. It aims to restrain excessive risk-taking and short-termism by making institutional investors more responsible to the public. In contrast, the Japanese Stewardship Code aims to change the attitude of domestic institutional investors in order to orient Japanese corporate governance towards the interests of shareholders rather than stakeholders. This goal of the Japanese Code is more compatible with the logic of stewardship than that of the UK Code. At the same time, the Japanese Government considers this goal to be in the public interest of Japan.

Another finding of this article is that different stewardship codes have different goals and that this must be taken into consideration when assessing their effectiveness. The success of the Japanese Stewardship Code will primarily depend on how well domestic institutional investors are incentivized to act in the interest of their ultimate beneficiaries and to monitor entrenched management. Conversely, the success of the UK Stewardship Code will likely depend on the extent it can prompt institutional investors to consider the interest of the public and stakeholders other than shareholders. Regulatory interventions might be necessary in both cases, but for different reasons.