The Impact of Japan's Stewardship Code on Shareholder Voting

Abstract

This study investigates the impact of the stewardship code, which is not mandatory with legally binding regulations, on the shareholder voting activity of institutional investors. Despite the introduction of the stewardship code in the UK and some European countries, its impact on shareholder voting remains unexamined. We find that Japan’s stewardship code changes the voting activity of institutional investors. Trust banks (Japanese institutions that combine the functions of commercial banks, depositary institutions, and trust companies) that have accepted the code and have no lending relationship with investee firms, as well as insurance companies that have accepted the code, regardless of their lending relationships with investee firms, become opposed to top management appointments in the post-code period, when investee firms exhibit lower profitability than their industry peers. Furthermore, mutual funds, pension funds, and foreign investors are more likely to vote against top management appointment in firms with lower profitability after implementation of the stewardship code. This study provides evidence that the stewardship code encourages institutional investors to change their shareholder voting activity to fulfill their stewardship responsibilities.