Japan’s Stewardship Code – Guidelines
Based on the revised Japan’s Stewardship Code (hereunder, the Code) which was published in March 2020, Sumitomo Mitsui Trust Bank, Ltd. (hereunder, the Bank) revised our “Guidelines on Stewardship Responsibilities” and “Guidelines on the Principles of Japan’s Stewardship Code”. As one of Japan’s premier institutional investors, we will fulfill our stewardship responsibilities.
Sumitomo Mitsui Trust Holdings, Inc, the parent company of the Bank, has established the ‘Policies regarding the Fiduciary Duties of the Sumitomo Mitsui Trust Group’ as its policies for “client-oriented” initiatives. The parent company has committed to enhance the corporate governance structure as it shifted to a company that includes a nominating committee, and to effectively fulfill our stewardship responsibility.
“Guidelines on the Principles of Japan’s Stewardship Code”
Principle 1: Institutional investors should have a clear policy on how they fulfill their stewardship responsibilities, and publicly disclose it.
We will fulfill our stewardship responsibilities under the “Guidelines on Stewardship Responsibilities.
- We have a stewardship responsibility over our assets under management. In order to fulfill the stewardship responsibilities, we will require our external asset managers to enhance the value and growth of the investee company by gaining a deep understanding of the company and its business environment and also considering sustainability on their business through engagement and the exercise of voting rights, and maximize the medium to long-term return on investments for our clients (beneficiaries).
- We will require our external managers to control adequate resources to conduct analyses of financial statements, social and environmental issues, and non-financial information such as ESG activities including corporate governance, and participate in meaningful engagement meetings and the exercise of voting rights” with regards to assets under management.
- As one of Japan’s premier institutional investors, we believe that our stewardship responsibility is a social responsibility that contributes to the economic growth of Japan by fulfilling our stewardship responsibilities.
Principle 2: Institutional investors should have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it.
As part of our stewardship responsibility, we will appropriately manage conflicts of interest under our “Conflict of Interest Management Guidelines” and “The Enhancement of the Conflict of Interest Management Structure relating to the Asset Management Operation”.Also, we will require our external asset managers to have clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it
- Under our mission of “establishing trust by practicing sound management based on a high level of self-discipline and our fiduciary spirit”, we will further advance our conflict of interest management structure for the entire group and thoroughly implement our fiduciary duties across all business lines.
- On conflicts of interest arising from stewardship activities, we place our clients’ (beneficiaries’) interest first, and adhere to strict management practice under our internal conflict of interest management provisions, provisions on conflicts of interest in the fiduciary business, and regulations and guidelines on asset management. In addition, we have already disclosed the outline of policies defined in provisions on conflicts of interest in the fiduciary business.And we will require our external asset managers to disclose how they manage conflicts of interest in fulfilling their stewardship responsibilities.
- At the Bank, the Officer in charge of the Fiduciary Services Business exclusively holds all authority relating to our exercise of voting rights, independent from the authority to execute other business activities. We have excluded the exercise of influence, which may arise when exercising voting rights, as a conflict of interest in the Fiduciary Services Business.
Principle 3: Institutional investors should monitor investee companies so that they can appropriately fulfill their stewardship responsibilities with an orientation towards the sustainable growth of the companies.
In order to fulfill our stewardship responsibility by ensuring sustainable growth of the investee company, we will require our external managers to monitor and grasp the status of the investee company.
- We believe that it is important to evaluate investee companies from a mid to long term standpoint. Thus we will require our external managers to accurately grasp and understand the company financials, ESG-related information, effectiveness of management, business foundation, market trends, effectiveness of the business strategy, and non-financial information relating to sustainable growth. By their continuously monitoring and researching the investee company, we can effectively grasp the situation that it is placed under.
- In addition, we will require our external managers to endeavor to identify at an early stage, issues that may result in a material loss in the value of investee companies by conducting research on environmental and regulatory changes, and make every effort to avoid scandals, accounting fraud other credit risk events.
Principle 4: Institutional investors should seek to arrive at an understanding in common with investee companies and work to solve problems through constructive engagement with investee companies.
We will require our external managers to share and recognize common views with investee companies and resolve issues through constructive engagement.
- We will require our external managers to endeavor to reach a common understanding with the investee company to enhance its sustainable growth through regular, continuous engagement with management, planning and finance officers. Also, we will require our external managers to explain the number of shares we have to the investee company if it is needed.
- If any act that disregards the interests of shareholders, misconduct or anti-social behavior by an investee company or its management occurs, or its corporate value is damaged due to problems such as poor medium to long-term performance, we will consider such act as a serious issue in the investee company’s corporate governance, and we will require our external managers to exercise voting rights in a way that would improve the investee company’s corporate governance. We will require our external managers to request investee companies that have engaged in anti-social behavior to provide a full explanation of the recurrence prevention measures, progress of improvement measures, and efforts towards improvement of its corporate governance, and we will arrive at a decision on the exercise of voting rights based on the explanations.
- Analysis of non-financial information is necessary for effective engagement. We believe that effective non-financial information analytical capabilities will lead to a more productive engagement. We will require our external managers to fulfill stewardship responsibilities by solving problems through a highly effective dialogue, and by appropriate exercise of our voting rights.
- In principle, we will require our external managers to engage in an independent dialogue with investee companies. However, if it leads more beneficial result, other institutional investors should be invited to the meeting for effective engagement.
- We are mindful to require our external managers not to obtain any material or insider information during our dialogue with investee companies. However, if we receive such information, or where there are risks of exposure, we will abide by our internal guidelines and procedures accordingly.
- We will require our external managers to consider the mid- to long-term enterprise value of the investee companies when they conduct engagement activities on sustainability matters.
Principle 5: Institutional investors should have a clear policy on voting and disclosure of voting activity. The policy on voting should not be comprised only of a mechanical checklist: it should be designed to contribute to sustainable growth of investee companies.
As an institutional investor whose goal is the sustainable growth of the investee company, we will require our external managers to exercise our voting rights through “Sumitomo Mitsui Trust Bank’s Basic Policy on the Exercise of Voting Rights”, and publicly disclose the results of all voting records for all investee companies and how we voted on each issue for each company every quarter
- As a “responsible institutional investor”, we consider the exercise of voting rights an important part of our stewardship activity.
- Our exercise of voting rights must intend to contribute to a sustainable growth of investee companies thereby maximizing medium to long-term investment returns for our clients (beneficiaries). Based on investee companies’ conditions and details of engagements with those companies, we will require our external managers to exercise voting rights not only pursuant to the formal criteria for decision making, but after comprehensively considering the extent to which our exercise of voting rights would contribute to sustainable growth of investee companies (and to maximization of medium to long-term investment returns for our clients (beneficiaries)) Furthermore, if a proposal has several interchangeable options, we will require our external managers to make our decision to exercise the voting rights by prioritizing the option that would contribute most to sustainable growth.
- We will require our external managers to publicly disclose how we voted on each issue for each company every quarter by explicitly indicating the relationship with us based on objective information intended for all investee companies. As always, we make public disclosures through our website by adding the results of all investee companies every quarter. We will require our external managers to disclose the reason why they make the decision on an issue which might have the conflict of interests.
- As a general rule, we do not receive advisory services from proxy advisory companies. However, if our external managers we exercise voting rights for its treasury shares (shares in Sumitomo Mitsui Trust Holdings, Inc.), we will require them to exercise voting rights by obtaining advice from an external expert research service organization based on these guidelines to exercise the voting rights. When our external managers receive such services, we require them to disclose the name of companies/organization and how to use the services.
- On stock lending transactions, we set a lending limit when obtaining voting rights.
Principle 6 - Institutional investors in principle should report periodically on how they fulfill their stewardship responsibilities, including their voting responsibilities, to their clients and beneficiaries.
In order to fulfill our stewardship responsibilities, we will periodically report to our clients.
- As part of our stewardship responsibilities, we will require our external managers to make periodic reports via our website and other means, on our voting records, dialogue with investees.We will maintain all records of our votes. On the reporting format and contents, we will discuss our clients’ (beneficiaries’) requirements and make appropriate changes.
Principle 7 - To contribute positively to the sustainable growth of investee companies, institutional investors should have in-depth knowledge of the investee companies and their business environment, consideration for sustainability on their business and skills and resources needed to appropriately engage with the companies and make proper judgments in fulfilling their stewardship activities.
To make dialogue with investee companies constructive and beneficial, and to contribute to the sustainable growth of the companies, we will develop skills and resources needed to appropriately engage with investee companies and to make proper judgments based on in-depth knowledge of the companies and their business environment and consideration for sustainability on their business
- We will require our external managers to fulfill our stewardship responsibilities through constructive dialogue with investee companies in order to achieve sustainable growth. For this, we believe that skills and knowledge required for appropriate stewardship activities are important. We believe that the management of investee companies should have adequate competence and experience. To fulfill our stewardship responsibility, we will continue to commit to the advancement of our capabilities. The management of our company understands that it has an important role to perform in constructing the appropriate organizational structure and training its staff. The Officer of the Fiduciary Services Business will make every effort in this respect. We also require our external managers to maintain and enhance their organizational structure and training its staff to fulfill the stewardship responsibilities.
- We believe that it is vital as a fiduciary to improve our stewardship activities and enhance our corporate governance structure and manage conflicts of interest. As “a responsible institutional investor who will comply with stewardship responsibility”, we will require our external managers to periodically review and evaluate our activities and adherence to the principles of the Code, and publicly disclose our evaluation in order to promote visibility.
Principle 8 - A company that provides financial service to institutional investors should support clients to fulfil their stewardship responsibilities and play a key role in the investment community.
If we provide financial service such as proxy advice to institutional investors, we will support clients to fulfill their stewardship responsibilities and endeavor to play a key role in the investment community.
- If we provide financial services to institutional investors, we will define the case that might have the conflicts of interest and disclose how to manage it.
- If we provide proxy advice to institutional investors, we will maintain sufficient and appropriate organizational structure and disclose it and implement a conflict of interest policy in order to give assurance about the accuracy and reliability of our advice.
As a responsible institutional investor, we shall conduct stewardship activities, including engagement and proxy voting, with a view to enhance mid to long term corporate value. Through our stewardship activities, we will enhance the medium to long-term investment returns for clients and beneficiaries. Moreover we shall conduct our activities with strong consideration for environmental, social, and governance (ESG) matters which are referred in international initiatives such as Principles for Responsible Investment (PRI) and the United Nations Global Compact to which we are a signatory.
Engagement Guidelines at SuMi TRUST
In accordance with Principles 3 and 4 of the Code, we will comply with the guidelines below and engage with companies as part of our stewardship activities. The revision or abolition of this guideline will be implemented after a final decision made by the Officer in charge of Fiduciary Services Business.
- (1)We, as a responsible institutional investor, shall engage with companies with the view to enhance corporate values and encourage sustainable growth subject to “Japan’s Stewardship Code” to which we have announced our commitment, in order to enhance long term investment returns for our beneficiaries and clients.
- (2)The targeted companies are investee companies that are in our investment portfolio. Based on analysis including corporate strategy, business performance, capital structure and risk (including social and environmental risk), we will engage with companies that offer potential for higher corporate value and sustainable growth.
- (3)As it is imperative to understand the exact nature of the situation and status, we shall make every effort to study and understand the governance, capital structure, business strategy and risk management of companies prior to any engagement.
- (4)We are mindful not to obtain any material or insider information. Where there are risks of exposure, we will abide by our internal guidelines and procedures accordingly.
- (5)We shall engage primarily with company management. Through an all-encompassing engagement process, we shall build trust and share our views on issues concerned.
- (6)Comments made to companies by SuMi Trust during engagement shall be conductive to improvement in corporate value and must not be deemed as “acts of making an important proposal” as defined in the Financial Instruments and Exchange Law.
- (7)All comments made by both SuMi TRUST and the company shall be briefly and transparently documented. Furthermore, we shall monitor through publicly available information, the effectiveness of engagements by subsequent corporate actions taken.
- (8)Engagement activities shall initially be reported to the “Stewardship Engagement Committee” and shall be appropriately reported to beneficiaries and clients.