Second Revision to Japan’s Stewardship Code

Starling Team

On March 24th 2020, the Financial Services Agency of Japan (FSA), through the Council of Experts on the Stewardship Code it had established, offered a revision to the Stewardship Code that had been published in 2014.  The revision prompts a focus on environmental, social, and corporate governance (ESG) factors surrounding sustainability and investor stewardship. 

Previously, the Code had featured seven principles.  With this revision, an eighth principle is added, applicable to many financial service providers, including investment consultants for pension funds, and proxy advisors.  These professionals  should endeavor to contribute to the enhancement of the investment chain’s function and provide appropriate services for institutional investors.

The revised Code also asserts that asset owners should encourage asset managers to secure beneficial owners’ interests by engaging in effective stewardship activities.  Under the revised Code, stewardship responsibilities are defined as:

“The responsibilities of institutional investors to enhance the medium – to long-term investment return for their clients and beneficiaries by improving and fostering the investee companies’ corporate value and sustainable growth through constructive engagement, or purposeful dialogue, based on in-depth knowledge of the companies and their business environment and consideration of sustainability consistent with their investment management strategies”.

In April this year, nearly 300 institutional investors accepted the suggested changes to the Code and adopted a “comply or explain” approach when the Code is not applied.  We have not, to date, heard much from the FSA regarding its views on how culture and conduct related risks feature in connection with this new emphasis on stewardship.

However, as in many other markets, Japan has suffered prominent misconduct scandals in the last year and these revisions to the Stewardship Code may be driven in part by concern for improved management of non-financial risks among Japanese firms.

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The New Normal: Conduct Risk & Personal Accountability

Starling Team

On 30 April, Starling released its 3rd annual Compendium, a report on global regulatory activities aimed at promoting improved culture and conduct in the banking sector.  The series of reports has traced the evolution in thought regarding the supervision and governance of conduct risk among bank regulators and industry leaders, worldwide. As in previous years, clear trends have emerged, as reflected in the Key Takeaways found in this year’s report:

  • CEO turnover – Misconduct was a principal driver of CEO turnover in the last year, which saw far higher than usual CEO churn. 
  • Personal liability – The last year has seen a continued emphasis on individual accountability and personal liability schemes in several jurisdictions.
  • Anticipating outcomes – Regulatory efforts around culture and conduct risk have become grounded in an overt concern for customer outcomes.

Culture and conduct management challenges were prominent in many industries over the last year, including the banking sector.  As a result, RegTech firms have begun to bring governance tools to market, and some bank regulators now actively promote the trialing of such tools among the firms they oversee.  Heightened regulatory sensitivity to culture and conduct risk implies a need to explore new tools and approaches to risk identification, assessment, and mitigation. 

To access a  full copy of Starling’s Compendium, click here.  Last year, Starling and Regulation Asia shared findings from earlier issues of Starling’s report – covering the UK’s leadership role in driving the global supervisory agenda around conduct and culture and post-Royal Commission developments in Australia, to Hong Kong’s ecosystem approach and Singapore’s push to addressing culture and conduct issues.

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Leveraging Technology and Hong Kong’s Unique Position to Manage Risk

Starling Team
Hong Kong markets show continued resilience, in part due to the focus on risk management at the local exchange. (HKEX)  The role it plays in global capital markets and the city’s position as connector between the East and the West, require a rigorous approach to risk. And good governance and risk management has played a key role in shaping and supporting trust in Hong Kong as an international financial centre. 

The symbiotic relationship between such trust and effective risk governance continues to shape Hong Kong’s future, and has prompted an ecosystemic approach with some focus on the promise of data technologies.  “At HKEX, we believe that collaboration with regulators, market participants, and all of our stakeholders is one of the keys to managing operational risks,”said John Killian Group Risk Officer at HKEX.  “We are also increasingly bringing innovation and technology to bear in helping us assess, calculate, control, and mitigate financial, operational, and market risk.” 

Today, HKEX is finding ways to make risk management a competitive advantage.  Technology solutions that originate from the HKEX Innovation Lab help to ensure that they are able to maintain robustness and resiliency, even amidst current volatility.  In this, the relationship between risk and trust is paramount.  “The better we are at managing risk, the more comfortable investors and market participants are trading on our platforms, and the lower their costs of trading become,” said Killian. 

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Conduct, Culture, and COVID-19

Starling Team
Cultures are an “emergent outcome” of human interactions.  With that in mind, the question posed in a recent post from the UK’s Financial Conduct Authority is: “If culture is the ‘way things are done around here’, what happens when there is no ‘here’ anymore?”

The COVID-19 pandemic has completely changed the way we live and work.  As a result, we are facing both challenges and opportunities surrounding corporate culture and conduct risk management.  For many in the financial services industry who are now able or required to work from home, this way of working may be the “new normal” for a considerable while.  Indeed, many employees have signaled that they prefer working from Hom, and some firms have seen cost savings through remote working. 
New risks also come with this change, the stress and financial pressure of the pandemic poses increased risk of misconduct.  Employers cannot afford to let workplace culture fall down the agenda.  When people aren’t in the office, it’s difficult for managers to ensure that all employees are behaving appropriately without tipping into objectionable Big Brother methods. 

This is why focusing on workplace culture and behavior is key during this crisis.  Some key considerations that have been long-running themes in the FCA’s work on culture include: purpose, leadership integrity, identifying risks and opportunities, psychological safety, diversity and inclusion, among others.

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Authorities to Open up Public Financial Database to Public for Innovation

Starling Team
To nurture a data-based financial industry and to promote “fintech” (financial technology) businesses, Korea’s financial authorities will make 44.5 million pieces of public financial data available to the public.  This data consists of large sets of information stored at the Financial Services Commission (FSC) and several other public financial institutions in Korea. 

Listed firms are required to report their financial data to the financial authority via an online-based data analysis, retrieval, and transfer system, according to the Act on External Audit of Stock Companies.  Non-listed firms here are exempted from the formal disclosure requirement.  However, information about non-listed firms including Korea Development Bank and Industrial Bank of Korea will be made public as part of the new scheme, to include data on corporate governance and financial soundness.

In April, the financial regulator ran a pilot test that offered public financial data to fintech firms, startups, and research institutions.  “The opening of public financial big data will foster fintech firms’ data-driven innovative services,” an FSC official said.  Financial sector regulators are increasingly looking to collaborate with data-technology companies and are promoting data-sharing schemes to help create new opportunities for improved financial services offerings and regulatory capacities.

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