Japan's $52 billion Pension Fund Association (PFA) is studying how the California Public Employee Retirement System (CalPERS) has revolutionized institutional investors' approach toward corporate governance, and may design similar strategies. Given the highly influential role the PFA plays among Japan's corporate pension funds, any such moves would likely have a big impact on investment strategy across the industry.

The communications link between the two institutions is Jetro, the Japan External Trade Relations Office, a government body charged with managing Japan's bilateral trade. Former Ministry of Health and Welfare official Hiroyuki Mitsuishi has recently been appointed to Jetro's pension and welfare department in New York, a role that has existed for a decade, as a go-between on pension-related issues. He says Japanese public funds such as the PFA and the Government Pension Investment Fund have taken a keen interest in how various state funds across the United States have led the charge for better corporate governance.

He notes that most Japanese corporate pension funds could never really mimic what a group like CalPERS does, in terms of its hands-on activism and push for transparency and accountability among fund managers and listed companies. That's mainly because Japanese pension funds are too small and lack the manpower. The PFA is an exception, however, and it has recently staked out a role as Japan's institutional model for corporate governance. In mid-2003 it formulated relatively aggressive guidelines for proxy voting, including pushing companies to have a minimum of independent directors.

"In the future, Japanese institutions and public funds will try to take concrete action on corporate governance," Mitsuishi says.

The PFA is now studying some strategies CalPERS has adopted. One of these is a strategic commitment to overseas corporate governance investment funds, as the organization has no direct influence outside the US. CalPERS invests in customized funds aimed at companies with good governance made by Sparx in Japan and Hermes in the United Kingdom. These funds also target underperforming managements as a value investment, and take steps to improve how those companies operate. For example, Sparx's fund invested in Nissan and worked with its management to improve its corporate governance, and thereby boost its share price.

The PFA is talking with CalPERS about replicating this with other fund managers, or perhaps investing in CalPERS' Sparx fund. (See the new December/January edition of AsianInvestor magazine for a Q&A with the PFA about its investment strategy.)

"If the PFA wants a corporate governance investment strategy, more Japanese companies will focus on corporate governance," says Mitsuishi.