Japan Pension Fund Threatens Contract Termination for Poor Stewardship Performance

Japan's Government Pension Investment Fund (GPIF) is taking a firm stance on its stewardship code, warning that asset managers failing to meet performance evaluations could lose their contracts. Hirokawa Hitoshi, head of ESG and Fiduciary Duty at GPIF, explained the fund's unique approach during an interview.

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If an asset manager's stewardship code implementation evaluation is poor, it can lead to the termination of the asset allocation contract.

GPIF, managing approximately 294 trillion yen ($2.7 trillion), delegates voting rights and engagement activities to external asset managers. Unlike South Korea's National Pension Service, which handles these directly, GPIF's model is designed to avoid direct influence on corporate management due to restrictions on direct investment in physical stocks. "We considered what we could do to fulfill our fiduciary duty within those principles, and this is the result," Hirokawa stated.

While GPIF does not dictate voting on individual proposals, it has established clear principles for stewardship and voting. Asset managers are evaluated annually on their stewardship activities, investment policies, operational processes, and internal controls. Poor evaluations can lead to the termination of asset allocation contracts. Hirokawa clarified that GPIF operates independently of the Financial Services Agency, though it adheres to the stewardship code.

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GPIF's model is very unique among global asset owners. Direct investment in physical stocks is prohibited. Within those principles, we considered what we could do to fulfill our fiduciary duty, and this is the result.

Data from 21 asset managers between 2017 and 2022 showed that engagement activities led to statistically significant improvements in corporate value indicators like PBR, as well as increases in the number of outside directors and total shareholder returns. GPIF also actively manages potential conflicts of interest for asset managers affiliated with large financial groups, requiring measures like organizational separation or independent committees to ensure the beneficiaries' interests are prioritized.

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We do not instruct on individual proposals. It is entirely up to the asset manager's judgment. However, we have established stewardship principles and voting principles that asset managers must adhere to.