Shareholders play a vital role in corporate governance by casting votes on crucial decisions within the companies they invest in. To enhance transparency and accountability, regulatory entities worldwide, including government bodies and stock exchanges, are progressively enacting guidelines to ensure institutional investors are accountable for their voting actions and fulfil their fiduciary responsibilities effectively.

A significant study published in the ‘Corporate Governance: An International Review’ on 22 January 2025 highlights that even non-binding regulations can spur institutional investors to adopt a more proactive stance, thereby enhancing corporate governance standards. The research, led by Professor Toru Yoshikawa from Waseda University and Associate Professor Daisuke Uchida from Keio University, focused on the responses of institutional investors to the 2017 amendments made to Japan’s Stewardship Code, which now mandates the disclosure of their voting records.

Professor Yoshikawa pointed out that the amendment aimed at disclosing voting records has motivated institutional investors to take a more engaged role in the corporate governance of the companies they invest in. “We were particularly interested in observing how institutional investors, key players in corporate governance, reacted to this amendment, especially analysing the variances between domestic investors, who traditionally played a more passive role, and foreign investors, who are typically more active,” he explained.

The researchers scrutinised the voting on 7,887 proposals involving 5,051 directors across 495 TOPIX 500 companies and the top 500 firms listed on the Tokyo Stock Exchange. Typically, director candidates are endorsed by the company’s board, and traditionally, domestic Japanese institutional investors often supported these candidates to maintain amicable relations with the companies. However, post-amendment, there was a marked increase in shareholder dissent during director elections.

This change was particularly pronounced in companies with substantial domestic institutional ownership. In contrast, firms with a higher proportion of foreign institutional investors exhibited little or no change in their voting patterns. Furthermore, the opposition to board-endorsed directors was most intense when the directors were perceived as underperforming or unqualified. “Previous research indicates that foreign investors often have different goals than domestic investors and place more emphasis on the corporate governance of the firms they invest in. However, our findings reveal that domestic investors responded more strongly to the regulatory change concerning the disclosure of voting records than their foreign counterparts, increasingly casting dissenting votes against director candidates at general shareholders’ meetings,” Professor Yoshikawa noted.

The study elaborates that domestic institutional investors, such as local banks, trust banks, and insurance companies, are more likely to adhere to local regulations owing to their dependence on local regulatory authorities for legitimacy. In contrast, foreign institutional investors generally conform to international standards and are less influenced by domestic laws. “Our theory and findings illustrate that domestic institutional investors tend to diverge from their foreign counterparts in response to regulatory cues due to their varying levels of reliance on the legitimacy granted by regulatory bodies, although they are all classified under the umbrella of institutional investors. This indicates that shareholder preferences are diverse and subject to change over time,” Professor Yoshikawa added.

The enhanced accountability in shareholder voting, precipitated by Japan’s disclosure rule, underscores that regulatory reforms can substantially improve corporate governance. These findings offer a model for other Asian countries transitioning to Western-style corporate governance systems, suggesting that strategic regulatory measures can foster similar improvements.

More information: Toru Yoshikawa et al, The Differential Effect of Regulatory Signals on Shareholder Dissent: The Case of Shareholder Voting in Director Elections, Corporate Governance: An International Review. DOI: 10.1111/corg.12640

Journal information: Corporate Governance: An International Review Provided by Waseda University