Proxy advisor ISS likely to add ROE to Japan guidelines next year

TOKYO, April 23 Tue Apr 22, 2014 11:09pm EDT

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TOKYO, April 23 (Reuters) - Influential proxy advisory firm Institutional Shareholder Services (ISS) said it is likely to include return on equity to its voting guidelines for Japan next year amid efforts to change a corporate culture long criticised for neglecting shareholders.

Japan's government has been calling for more companies to adopt outside board members and is promoting a stock index that weighs ROE, in an attempt to lure more individual and foreign investors to its equities market.

It has also launched a stewardship code aimed at holding institutional investors more accountable and encouraging communication between shareholders and corporate boards. Such efforts also aim to diffuse tension between foreign investors whose demands, for example to boost ROE, have often met with stiff resistance from management.

"There was a time when ROE was associated with something negative, such as demands from 'greedy' shareholders," Takeyuki Ishida, executive director of ISS in Japan, told Reuters. "But it's becoming something normal to talk about, less negative."

Ishida said a recent survey of clients found that most believed it was a good idea to take ROE into account in their voting on company directors.

"Our clients think it's good to incorporate, so we'd like to do it. We haven't yet decided on details on how it could be done, but it is something we want to do," he said.

ROE, which measures how efficient companies are at generating earnings from shareholder equity, has historically been low among Japanese companies. According to the Life Insurance Association of Japan, the average ROE among listed domestic companies, excluding the financial sector, is around 5 percent compared with more than 15 percent in the United States.

Some foreign investors say this is due in part to companies prioritising the interests of employees and business partners over those of shareholders.

Ishida said ISS was not changing its voting guidelines for Japan this year, and would decide over the next several months on how it could incorporate ROE into its guidelines from 2015. (Reporting by Ritsuko Ando; Editing by Stephen Coates)

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