By Nicholas Benes

April 11, 2022

The writer is the chief executive of The Board Director Training Institute of Japan, but this article reflects his personal opinion. In 2013, he proposed to the Japanese government that it adopt a corporate governance code, and advised informally on its contents.

Do you know how exactly your pension fund, investment trust, mutual fund, or insurance company votes shares that it owns on your behalf, at each AGM? Can you easily compare the past voting records of asset managers, to confirm that their votes are aligned with their policy statements?

Probably not, because in most countries this information is not legally required to be publicly disclosed. Where there are regulations or soft law, disclosure is made on a hard-to-access, non-comparable, and/or voluntary basis.

This is a gaping hole in our systemic infrastructure, especially in view of the critical importance of responsible stewardship in an age of rising sustainability concerns.

Asset owners and managers publicly insist on “holding executives accountable”, but without disclosure of their own votes (or failure to vote), how can their beneficiaries hold them accountable? Isn’t “what’s good for the goose, good for the gander?”

Fortunately, a new dawn may be rising on this long-ignored defect of the investment chain. Last September, the SEC proposed to enhance the public disclosures legally required of mutual funds, exchange-traded funds, and other funds in its Form N-PX, by standardizing formats and categories of voting matters, and requiring the use of structured data coding (XML). These measures would make this “big data” much more machine-readable, comparable, and conveniently downloadable from the SEC’s EDGAR system.

If approved, the SEC’s enhancements will vault voting disclosure by many fund managers into the 21st century. Commissioner Allison Herren Lee specifically referred to three trends which led to the SEC’s proposal: (1) “the growth in households invested in funds” of all types; (2) “soaring demand for opportunities to invest in vehicles with ESG strategies”; and (3) “the rise of passive index funds, which… may operate to the detriment of corporate accountability – and on ESG matters in particular. “

The enhancements would likely cause many passive index funds to compete not only on costs (fees), but also on the quality of their voting. Competing on voting quality could become a way to gain market share while benefiting society and improving risk-adjusted price formation at the same time.

Most other countries’ regulations or stewardship codes stop short of requiring disclosure of per-agenda-item voting at each company. Instead, they tend to require investing institutions to merely disclose their “voting policy”, or only the votes they consider “significant.”

Even in the UK, pursuant to the Stewardship Code’s “soft law” principles, signatories are required to disclose their voting record at each company, but only on their individual website and in any format they like. By law, pension funds must file “Implementation Statements” that provide information only about those situations that they consider were “significant votes”. As a result, voting data is resides in a range of different formats and reports, is incomplete, is not machine-readable, and is very hard to collect and analyze.

Last year, the report of the UK’s “Taskforce on Pension Scheme Voting Implementation” wrote that “the DWP [Department for Work and Pensions] should encourage more and better reporting by schemes and should promote a vote disclosure reporting template. There is already precedent for this in, for example, the United States where Form N-PX …is used by many of the world’s largest asset managers.”

Compared to other countries, another possible leader in this space is Japan, where in 2013 I managed to seed the creation of a corporate governance code so that the upcoming stewardship code could function effectively. Amidst a range of disclosure requirements that ensued, the revised stewardship code now requires asset managers to disclose their voting records at each portfolio company, albeit also on a de-facto voluntary basis.

The end result is extremely similar to the situation in the UK. Not everyone discloses, and the data is scattered across the web in a variety of PDF formats that computer algorithms cannot easily read, let alone find.

But in Japan, where the government is committed to expanding Japan’s role as an international finance hub, there may be greater potential than in the UK to meet today’s needs for public access to the big data of voting records.

Along with the US, Japan has been a leader in creating centralized, publicly accessible systems that can be automatically accessed. Japan also uses XBRL taxonomies for different types of corporate disclosure documents that are standardized and of high quality.

Japan’s Financial Services Agency could easily create a section of its EDINET disclosure service (its version of the SEC’s EDGAR) to which stewardship code signatories comprising a wide range of institutions could submit their per-agenda-item voting records, formatted using a standard XBRL taxonomy. Even under the current principle of voluntary disclosure, here in Japan “name and shame” pressure would be a powerful force once a centralized system was in place.

This simple move would fit perfectly with Japan’s policies to promote “digitalization”, disclosure related to governance and sustainability, and constructive investor engagement.

By setting an example for other countries, Japan has an opportunity to help address what will soon be the largest remaining gap in accountability for ESG investing, thereby firming up its bona fides as a leading financial center. Without easily accessed voting data, many companies may soon be reporting based on comparable ISSB criteria for sustainability, but it will remain difficult to hold asset managers accountable for voting based on that disclosure. That result would truly be “only half a loaf”.

Nicholas Benes