GPIF

Japan's government pension fund could have its stake in companies capped at 5% in exchange for the ability to hold shares directly -- a limit proposed to appease the corporate sector concerned about political intervention in company affairs.

A Ministry of Health, Labor and Welfare panel has been weighing structural and operational reforms at the Government Pension Investment Fund since December. Chief among them is a proposal to let the fund hold shares directly, thereby shaving operating costs and boosting efficiency. The GPIF calculates that lifting the direct-shareholding ban would save 1 billion yen ($8.44 million) a year in management and other fees paid to financial institutions.

Debate on the reforms was initially expected to conclude as soon as January, but now looks to drag into February. Several members of the panel have voiced concerns that letting the GPIF exercise voting rights on its shares could lead to undue state influence over companies.

Banks in Japan have their stakes in most companies capped at 5% by law to keep them from controlling operations. The ministry looks to adopt a similar limit to address such concerns. Revisions to the law governing the GPIF will be submitted to the Diet during the current session once the details are worked out.

The pension fund held around 32 trillion yen in Japanese stocks as of March 2015, putting it in control of 7.6% of the market here. Voting rights on those shares are currently entrusted to the asset managers the GPIF uses to buy its stocks. Those rights would revert to the pension fund itself if shares were directly held.

Investors with 3% or higher interest in a company are able to call a general shareholders meeting, while those holding 10% or more can propose the company be dissolved. Majority shareholders have effective veto power over all major decisions.

The welfare ministry plans to allow the GPIF to exercise its voting rights. Japan's stewardship code encourages institutional investors to exercise voting power on their shares rather than neglect ailing companies. Limiting the fund's voting rights would disappoint overseas investors excited about Japan's push for better corporate governance, said Theresa Whitmarsh, executive director of the Washington State Investment Board in the U.S.

The ministry panel also is weighing handing over voting rights to a proxy organization to prevent political intervention. That plan is modeled on the Bank of Japan, which sets guidelines that instruct its proxies how to use voting rights.

Some other countries including Canada, Sweden, the Netherlands and South Korea let their public pension funds hold shares directly. Norway's Government Pension Fund used its voting power to oppose the appointment of some directors at Japanese electronics giant Toshiba after the company's accounting scandal came to light.