May 15 (Bloomberg) -- Investors with $5 trillion of assets including Calpers, the biggest U.S. pension fund, are backing hedge fund demands that Japanese companies raise shareholder returns and make their decision processes more transparent.

The Asian Corporate Governance Association, representing global institutions such as the California Public Employees' Retirement System, known as Calpers, presented a White Paper to the Tokyo Stock Exchange and met officials of the ruling Liberal Democratic Party today.

Managers in the world's second-largest economy discourage investment by failing to meet global standards, according to the group. Its call for improving corporate governance coincides with efforts by hedge funds including The Children's Investment Fund Management Ltd. and Steel Partners to win bigger dividends and a bigger voice in corporate decision-making.

``Foreign investors are increasingly seeing poor corporate governance as a drag on corporate value and therefore on the market,'' Michael Connors, senior adviser at Hermes Fund Managers Ltd. in the U.K., said in a Bloomberg Television interview today. Improvements will prompt foreign investors including Hermes to increase investment in Japan, he added.

At risk may be foreign capital that drives Japan's stock market. Domestic equities last year saw the biggest outflow of foreign cash in 11 years, the Ministry of Finance said yesterday. Overseas investors sold a net 1.52 trillion yen ($14.5 billion) of Japanese stocks in the year ended March 31, the report shows.

Ranked Last

Japan ranked last among major economies as a destination for foreign direct investment between 1997 and 2006 in a study by the Organization for Economic Cooperation and Development.

Data from exchanges shows foreign investors own more than 25 percent of Japan's publicly traded companies and account for some 70 percent of domestic stock trading. The benchmark Topix index lost almost 19 percent of its value in the past 12 months, compared with declines of 6.2 percent by the Standard & Poor's 500 Index in the U.S. and 16 percent by the Dow Jones Stoxx 600 Index of European companies.

The white paper -- endorsed by seven global funds including Calpers, London-based Hermes and Canada's British Columbia Investment Management Corp. -- outlined six key issues in corporate governance and urges Japanese companies to increase shareholder returns, provide adequate supervision of corporate strategy and stop protecting management at the expense of efficient capital markets.

The Owners

Specifically, the institutions demand recognition that shareholders are the owners of public companies and want higher dividends, a ban on takeover defenses and a requirement for independent directors.

Jamie Allen, secretary-general of the Hong Kong-based group, called on Japan to come up with a code of corporate governance in line with practice in other Asian nations. Allen presented the policy paper to LDP officials including former Financial Services Minister Yuji Yamamoto. Allen also asked for changes to listing rules including shareholder voting and poison pills.

``I completely agree with the six main issues you point out and highly acknowledge your policy paper,'' Yamamoto said. ``Old practices in Japan must be changed with aggressive force or Japan is going to be left behind the global competition.''

Thwarted Bids

Hedge funds investing in Japan have similarly pushed for shareholder rights.

Acquisition attempts by Warren Lichtenstein's Steel Partners, which invested in more than 40 Japanese companies since 2003, have been thwarted as Japanese firms turned to defenses including so-called poison pills and friendly tie-ups. Last year, the fund failed to win control of condiments maker Bull-Dog Sauce Co. The Tokyo High Court called the fund an ``abusive acquirer'' when it ruled Bull-Dog could proceed with a dilution of the fund's stake.

The London-based Children's Fund, also known as TCI, has repeatedly sought bigger dividends and an end to cross- shareholdings by J-Power, Japan's biggest electricity wholesaler.

``Misalignment of management's interest leaves all genuine institutional and retail shareholders worse off and perpetuates undervaluation of the Japanese market,'' said John Ho, head of TCI's Asian division. ``The long-term poor performance of the market is prompting many to speak out more openly to hold management accountable.''

Bill Wilder, president of Nikko Asset Management Co., says cross-shareholdings prevent proper analysis of a company's value because it's impossible to know why the stock was purchased.

``I can't think of any good reasons for cross-shareholdings because you buy a stock as an investment,'' Wilder said. ``Presidents of companies should manage their business and leave stock picking to professional investors.''

To contact the reporter on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net.

Last Updated: May 15, 2008 02:38 EDT