corporate governance of japanese companies

Corporate Governance in Japan

2010/5/26

Akitsugu Era

Nikko Asset Management Co., Ltd. Registration Number: Director of the Kanto Local Financial Bureau (Financial instruments firms) No. 368Member Associations: The Investment Trusts Association, Japan/Japan Securities Investment Advisers Association

This material has been prepared by Nikko AM solely for the purposes of a presentation at TBLI Conference 2010. It is not solicitation for a specific fund. Moreover, the information in this material will not effect Nikko AM's fund investment in any way. Investment trusts invest in assets that change their value (assets in foreign currency bears the foreign exchange rate risk); therefore, net asset values fluctuate. Accordingly, it is possible for the NAV to fall below the amount of invested principal. Fees may be charged when purchasing, holding, and cashing out investment trusts. For more detail, please refer to the investment trust explanatory document (prospectus distributed in advance of application).

Corporate Data (As of End Dec ,2009)

AUM: 　 ¥10,104.4 Bn JPY

History: 　 50yrs

Employees: 530

Signatory of UNEPFI, UNPRI

Note: Consolidated Nikko AM and its overseas subsidiaries' assets under management (including advised assets).Note2: Total is less than the sum of each component due to the adjustment to eliminate double counting of investment advisory assets and investment trusts assets/fund of funds.Note3: Data of this fiscal year is disclosed on quarterly basis.


Basic stance towards Corporate Governance

“Representative of minority shareholders”

Mission Deliver return to clients

Methodology

VOICE: Exercise of voting rights , engagement (Ownership) EXIT: Pricing mechanism (Market efficiency)


Recent developments surrounding corporate governance

1. Compliance ⇒ Compliance & Protection of shareholder rights

Introduction of independent directors (TSE) Explicitly for the protection of shareholder rights

Amendments to Cabinet Office Ordinance on Disclosure of Corporate Affairs Disclosure of AGM voting results Disclosure of individual director compensation exceeding 100million JPY (Including breakdown of pay category)

2. Impact on corporate ownership structure

Amendments to Cabinet Office Ordinance on Disclosure of Corporate Affairs Disclosure of strategic stock holdings. (Top30, holdings exceeding 1% of capital)

Accounting & banking regulations (IFRS and Basel II)


Drastic shift in ownership structure

0

5

10

15

20

25

30

35

40

45

50

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Financial inst.

Non financial corp.

Foreigners

Individual

%

Source: TSE


Players within the financial institution category is changing

0

5

10

15

20

25

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Banks

Inv. Trusts

Life insurances

Non life insurances

Pension trusts

%

Source: TSE


Total shareholder return has increased

Source: MOF Corporate statistics

-5

0

5

10

15

20

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Net profits (RHS) Total return to shareholders (LHS)

Total return to shareholders/Net profits (RHS)

trillion yen


Over-capex was apparent during bubble era, but declined after 1990

0%

20%

40%

60%

80%

100%

120%

140%

160%

65 70 75 80 85 90 95 00 05

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Capex/CPCF (LHS)

Capex/Sales (RHS)Source: MOF Corporate statistics


Trading share in TSE 1st section

Source: TSE

0%

10%

20%

30%

40%

50%

60%

70%

80%

86 88 90 92 94 96 98 00 02 04 06 08 10

Financial InstitutionsNon financial corporationsForeignersIndividuals

%

CY


Future trend of ownership structure

What may be the potential ownership structure of Japanese companies?

The answer is yet to be determined, but we expect to see 4 patterns.

1. Ownership will likely decline Traditional financial institutions( banks, insurance companies) Pension funds

2. Ownership will likely remain at a high level but volatile Foreign shareholders

3. Ownership will likely remain at a high level with stable growth Individuals and Investment trusts

4. Ownership will likely increase. Non financial institutions and employees (Buy-backs + ESOP)

Considering these potential changes in ownership structure, we believe our responsibility as well as opportunity will increase.


Appendix: Quest for the right balance

1. The right balance at the right time, right place.

2. Substance rather than form

Independence

Incentive

Relationship with other stakeholders

Time frame (Short-term / Long-term)

Business (Economy) cycle Growth, mature

Too much cash or excessive cash?

Employee


Appendix: Challenges

Time Concentration of AGM

Approx 50% of AGMs are held within a single week of June

Lack of electronic voting system

The right incentive Compensation

Funding and investments


Appendix Disclosure on our proxy results are disclosed on our website.

No. of invested Japanese companies: 　 1954

（ July, 2008 ～ June, 2009)

Voice > Exit Engagement (Voice)

Over 100 meetings per year Proxy voting

Election of directors Votes Against : 6.4 %

Votes against total company agendas: 11.4%

　　　　　　　　　　　　　　　　　　　　　　（ July, 2008 ～ June, 2009)


■Comprehensive Risk Information on Mutual Funds○ Investment trusts invest in assets whose prices fluctuate (foreign currency-denominated assets contain exchange rate risk as well),

so the NAV will fluctuate accordingly. It is possible that the NAV will fall below your original investment. ○ Different investment trusts invest in different asset classes, markets, and countries, and are subject to different investment

restrictions, so the details of their risks differ accordingly.

Overview of fees and other costsCustomers will be responsible for the following costs:<Fees collected at subscription and redemption>　 Subscription fee 　　　　　 Maximum 3.675% (3.5% before tax)　 Redemption fee 　　　　　 Maximum 1.05% (1.0% before tax)　 Amount reserved for trust assets 　 Maximum 1.0%　 Switching fee 　　　　　 Maximum 0.21% (0.2% before tax)

<Costs paid indirectly by the customer for the trust assets (paid from the fund) >　 Trust Fees 　　　　　 Maximum 2.9975% (2.95% before tax)

　　　　　 Some funds charge a performance fee based on investment performance, etc.　 Other costs 　　　　　 Brokerage commission with respect to securities included in the portfolio, audit fees, interest on

borrowing　　　　　 and advances, 　 stock-loan related fees, etc.

　　　　　　　　　　　　＊ We cannot provide prior information on rates, maximum amounts, and other related information for other costs because they will vary depending on 　 investment performance.　　＊ The total amount of fees and other costs described above will vary depending on the length of investment period

　　　　　　　　　　　　　　　　　　　　　　　　　　　 and other factors. Therefore, we cannot give a specific total.　　＊ Please see the prospectus for details.

<Disclaimer>○ The figures listed above are the highest rates charged for fees and other costs as regards investment trusts managed by Nikko Asset

Management (as of the date of creation of this material).○ The risk information, fees and other information listed above assume investment trusts in general. Actual fees will vary for each specific

investment trust. For details, please refer to the investment trust prospectus.


Other matters to consider○ Unlike bank deposits or insurance policies, investment trusts are not protected by the Deposit Insurance Corporation or the Insurance

Policyholders Protection Corporation. Nor are investment trusts protected by investor protection funds when purchased at banks or other registered financial institutions.

○ Profits and losses made by the management of investment trusts all belong to the beneficiaries. The distributor will provide you with a prospectus either before or when you submit your application to this Fund, so please make an investment decision carefully after taking the time to read the contents in detail.

corporate governance of japanese companies

Economy & Finance