https://www.wsj.com/articles/japans-pension-funds-could-help-curb-cash-hoarding-1459357728　

With a portfolio exceeding 50% of Japanese GDP, pension funds have plenty of clout over investment decisions.

By Nicholas Benes　　March 30, 2016 1:08 pm ET

Almost three years after I first proposed in these pages that Japan adopt a governance code to raise productivity, the country now not only has a Corporate Governance Code but also a Stewardship Code for institutional investors. There has since been much discussion, and even exhortation by the government, about the urgent need to change the corporate mindset, engage with investors and increase companies’ return on equity. These are all major achievements. But when it comes to increasing corporate profitability through reinvesting in the real economy, there is still much progress to be made.

Japanese companies continue to sit on a mountain of excess cash. According to Japan’s Ministry of Finance, this mountain actually grew to $1.5 trillion in 2015 from $1.4 trillion in 2011, despite substantial increases in dividends and stock buybacks. During that same period, capital expenditure shrank by more than half.

At a time when interest rates are close to zero, Japanese companies are choosing not to borrow for capital expenditures and R&D. Instead, they have increased their capital ratios, to 45% from 35%, making it even harder to increase returns on equity.

Photo: Getty Images/istock

Clearly companies need more pressure to invest, and the most effective way is to start with Japan’s pension funds. With total investment portfolios exceeding 50% of the country’s gross domestic product, Japan’s domestic pension funds have plenty of influence. Add in foreign pension money and the impact is even greater.

To start, Japan should enact a retirement-income security act that would force pensions to better serve their beneficiaries, Japanese employees. At the moment Japan has no overarching system like the Employee Retirement Income Security Act in the U.S. or the Pension Act in the U.K.

There is no independent regulator that demands consistent duties for trustees and fund managers, robust disclosure to beneficiaries, neutral proxy voting, or active enforcement for all of Japan’s many different pension and retirement-income schemes. Clear rules about obvious conflicts of interest are scant, the legal liability of pension fund trustees ranges from vague to nonexistent, trustees’ level of sophistication is low, and the government does not guarantee the pension funds of bankrupt companies.

A retirement-income security act could require pension funds to sign the Stewardship Code or explain in yearly disclosures to beneficiaries why they did not sign it. This is essential because pension funds are the most important customers of many fund managers.

Next, Japan’s Government Pension Investment Fund, at $1.25 trillion the largest public pension fund in the world, should be tasked with raising stewardship awareness through its own concrete actions. The GPIF should set forth its own corporate-governance guidelines for its portfolio companies to follow, publicly support the corporate-governance code, and ask its fund managers to conduct proxy voting in line with both. So far the GPIF has done none of these things, which are standard practices at large public pension funds around the world.

At the same time, large foreign pension funds need to learn more about what goes on behind the scenes in Japan and refine their engagement with Japanese companies. After clamoring for many years for governance-improvement policies, these funds have some learning to do. They need to set forth seven or eight practices that they would like to see put in place by corporate managers over the next year, and should politely warn companies that if those practices are not put in place soon, they will consider voting against the re-election of some senior executives.

This is how foreign investors can get the full attention of Japanese companies while still playing by Japan’s own rules. Whether it is capital efficiency, independent committees, or policies for nominations criteria, director training or cross-shareholdings, the Corporate Governance Code gives foreign pension funds and institutional investors many nonhostile, common-sense practices to induce change. If they don’t make use of them, they and their beneficiaries have only themselves to blame. At the same time, by setting an example, they can accelerate stewardship thinking and practices at domestic pensions and other institutions.

The approaching annual general meeting season in June will either ring an alarm bell that companies have to get more serious about real reform, or sound the all-safe siren indicating that companies need only file formalistic Corporate Governance Reports with the Tokyo Stock Exchange before returning to life as usual. At this point, it’s not clear which it will be.

Mr. Benes is the representative director of the Board Director Training Institute of Japan, a nonprofit, public-interest organization certified by the Japanese government.

Appeared in the March 31, 2016, print edition as ‘Japan’s Pension Funds Could Help Curb Cash Hoarding’.