A Japanese CalPERS or a New Model for Institutional Investor Activism? Japan's Pension Fund Association and the Emergence of Shareholder Activism in Japan

Bruce Aronson, Creighton University

Abstract

If activist institutional investors are arguably the primary external monitors of management under leading corporate governance systems in the United States and the United Kingdom, who might assume that role in other countries? And, more importantly, what activist shareholder strategies may be possible under different corporate governance systems and operating environments that are generally less supportive of shareholder activism than the United States and the United Kingdom? This Article seeks to address that question through a comparison of the well-known strategy of CalPERS with that of a rare, real-world example of institutional investor activism outside of the “Anglo-Saxon” model—Japan’s Pension Fund Association (the “PFA”). It examines how institutional investors adopt activist strategies to fulfill their corporate governance role within two important sets of constraints: (1) resource and expertise constraints, and (2) constituency constraints.

It finds that similar resource and expertise constraints lead to basically similar investment portfolio strategies: diversified, passive index investing and a corresponding reliance on proxy voting. However differences in constituency constraints produce corresponding differences in strategic focus and “style.” CalPERS, which is supported and encouraged by its members and broader constituencies, stands out as a high profile and sometimes adversarial activist that acts as a “catalyst” for management accountability. In Japan the PFA, which is less supported by its member corporate pension funds and broader constituencies, acts as a “reluctant activist.” It has adopted objective, performance-based proxy voting guidelines and non-adversarial measures that emphasize and promote good governance rather than criticize poor governance. The PFA’s ability to adopt an activist strategy within its operating environment has practical significance as a more realistic model for the “rest of the world” than the United States and the United Kingdom. The PFA’s model also has theoretical significance as a new third data point that contributes to a broader understanding of the role and strategies of activist institutional investors in different operating environments.