Third Annual ACCJ Shareholder Forum
Focusing on active engagement and stewardship during the AGM season
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After more than a year of operating during the coronavirus pandemic—and adapting to the changes it has brought forth—companies are facing another season of shareholder meetings. With vaccinations signaling that we may soon emerge from the crisis into a more familiar, although changed, world, leaders are able to focus on other critical areas, such as the environment and sustainability, as well as diversity and inclusion.
On June 16, the American Chamber of Commerce in Japan (ACCJ) Alternative Investment Committee (AIC) hosted the third annual ACCJ Shareholder Forum. Held virtually once again this year, the event brought together six speakers with expert knowledge of the fiduciary and regulatory landscape:
- Satoshi Ikeda, chief sustainable finance officer at Japan’s Financial Services Agency (FSA)
- Nicholas Smith, strategist at CLSA Securities Japan Co., Ltd.
- Paras Anand, chief investment officer for Asia–Pacific at Fidelity International Ltd. (FIL)
- David Baran, chief executive officer of Symphony Financial Partners (Singapore) Pte. Ltd.
- Alicia Ogawa, director of the Project on Japanese Corporate Governance at Columbia University
- Seth Fischer, chief investment officer at Oasis Management Company, Ltd.
The mission of the forum is to address the lack of public information about the existence of shareholder initiatives among listed companies in Japan. This year’s discussion included timely issues for active investors, such as environmental, social, and corporate governance (ESG), climate-change disclosures, the growing emphasis on diversity of boards, and the differing styles of engagement used to achieve successful outcomes.
“These days, lots of attention is focused on boards of directors and corporate governance,” AIC Chair Frank Packard said during his opening remarks. “Less attention is focused on active engagement and stewardship. It is this attention gap that the ACCJ seeks to address with this forum.”
“Active investor engagement can lead to constructive results, and we see that with the Toshiba investigative report. This increased transparency only happened because an actively engaged investor requested an extraordinary general meeting of shareholders,” he added, referring to the revelations in June that the manufacturing giant allegedly colluded with government officials to influence the outcome of votes at its 2020 annual general meeting (AGM).
ACCJ President Jenifer Rogers, who serves as a non-executive director on the boards of three Japanese companies—Mitsui & Co., Ltd., Kawasaki Heavy Industries, Ltd., and Nissan Motor Co., Ltd.—welcomed attendees and shared how the chamber is modeling best practices in terms of governance and member shareholder engagement.
“For almost 10 years, the ACCJ and its members have advocated constructively with the government of Japan to improve corporate governance and investor behavior, to increase corporate value for all investors and stakeholders,” she said. “This event is part of a long-standing interest of our chamber members in these important issues.”
Rogers noted that the coronavirus pandemic has helped hasten the adoption of ESG principles at many companies and prompted more attention to be focused on climate change. “Changed attitudes about sustainability are also—and, should I say, finally—emerging in Japan.”
Response to Reform
Satoshi Ikeda provided perspectives on corporate governance reforms on behalf of the FSA, where he is chief sustainable finance officer. The agency’s reforms were launched in 2015 and recently finalized in time for June’s busy AGM season—despite resistance from Japan’s corporate chieftains.
“To put it bluntly, the corporate governance reform in Japan was really hated by Japanese corporate executives, and it continues to be largely so even today,” Ikeda said, adding that this is no surprise because such moves are intended to strengthen oversight of corporate executives. “It is human tendency to resist being deprived of entitlements,” he noted.
The reforms came after the persistently low profitability and low returns on equity at Japanese corporations came into the spotlight in the early 2010s, Ikeda explained. “It was perceived that Japanese corporate management was maybe too prudent. So, we thought it would be necessary to change the balance.”
Long-term equity investors are in the best position to help realize the “right vision-based finance” in Japan, Ikeda added, despite the negative image that many Japanese have of them as short-term speculators who descend like “a swarm of locusts” and demand an immediate payout through dividends or stock buybacks, and then disappear. But by aligning their interests with those of the company, long-term investors can encourage value creation for shareholders by engaging in stewardship activities, he said.
Reforms to the corporate governance code are also aimed at changing the traditional mindset at Japanese companies that prioritized clients and employees more than shareholders. That way of thinking also was not suitable for responding to civil society organizations pushing agendas, such as greater respect for human rights and addressing climate change.
Expanding Scope
Chris Wells, AIC vice-chair and a partner at law firm Morgan, Lewis & Brockius LLP, explained that, over the past year or so, the thinking about stewardship responsibilities has expanded beyond just improving corporate governance to embracing environmental and social responsibilities. But, he added, the adoption of a stewardship code by investors appears to have had very limited impact on advancing ESG objectives. The framework for the ESG goals envisioned in the stewardship code is “just not working” he explained.
One problem, he stated, is that some companies are criticized for greenwashing—conveying a misleading or false impression about how their products or services are environmentally sound.
What’s needed is the development of a consensus list of ESG metrics—relevant not just to shareholders, but to employees, suppliers, and service providers—that can be used to measure progress toward those goals, Wells said. “We cannot expect Japanese corporate managers, investment managers, or financial intermediaries to take action on ESG objectives if no agreed metrics exist whereby to measure their success.”
Government leadership is needed to help achieve this, Wells added. “Only government action can ensure that investors will receive this information in a consistent format—one in which they can compare apples to apples when making their investment decisions.”
What If?
Nicholas Smith, the Japan strategist for CLSA Securities, used a series of charts to talk about what could happen were Japan to take corporate governance seriously. He said the recently released Toshiba investigation report “totally changed” the governance landscape in Japan. “Activists have been handed a powerful new weapon. A lawyer-mandated investigation is clearly every bit as powerful as US discovery.”
A major reason the Japanese government has focused attention on corporate governance in recent years is that Japan’s ¥1.6 trillion Government Pension Investment Fund has shifted out of low-yielding bonds into stocks, Smith said. This move required three things:
- Investors trusting company numbers
- Companies generating an economic rate of return
- Companies sharing those returns with investors
According to Smith, “This is what corporate governance is about. It’s not about being a goody two-shoes. It’s about not pillaging granny’s pension pot.”
Next, he highlighted how 2021 is shaping up to be a big year for share buybacks, which have already reached three-quarters of last year’s total. Still, half of Japanese stocks are trading below book value, he said, suggesting “real potential in activism as governance issues are ironed out.”
Back in 1995, some 96 percent of companies held their annual meetings on the same day. While that figure has fallen to about a quarter, 82 percent of meetings continue to be held during the same week. This is still “unacceptably atrocious—a deliberate and transparent attempt to make it hard for the owners of these companies to attend the AGM,” Smith noted. And despite the pandemic, most companies are not permitting virtual attendance. Fifty-eight percent don’t permit electronic voting platforms and 55 percent don’t give English documentation, he added. “You couldn’t make this up. It’s almost as if they don’t want their investors to vote.”
The number of activist events in Japan had “exploded” in recent years, Smith stated, with Japan last year being the second-largest global market for activism after the United States.
Thematic Engagements
The forum then heard from three actively engaged managers, beginning with Paras Anand, chief investment officer for Asia–Pacific at FIL, who talked about how active managers are reshaping Japan’s corporate sector.
Anand, who spoke from Singapore, said that one key indicator of change is that five years ago, whenever his team would meet with company leaders, discussions about financial performance would have been separate from any talk of climate or social issues—or those topics would have been squeezed in at the very end. Now, “those two meetings are becoming much more integrated,” he said.
FIL has also held more “thematic engagements” with companies on single issues, Anand explained, such as trying to help address the plight of 400,000 stranded seafarers who operate the huge shipping vessels that carry much of the world’s cargo. These crew members are usually not allowed to disembark for a break or to see their families, meaning they are kind of stuck onboard “floating prisons.”
FIL has worked with shipping companies, airlines, and non-governmental organizations to spotlight the issue and, together with a coalition of investors, wrote a letter to the United Nations outlining measures they felt would alleviate this problem.
Anand said a smart way to amplify your voting rights as an active investor is to lay out your voting policy ahead of time—including what might be some red line issues—to show people how you’re going to vote. FIL has, for example, adopted new policies on climate change and gender-balanced boards that look at how companies are doing on those scores.
In Japan, FIL has adopted a new campaign for gender diversity which asks all investee companies to achieve a level of 30 percent by 2030 for three indicators:
- Percentage of women on the board of directors
- Ratio of women in management positions
- Percentage of all employees who are female
Long View
The second active investor, Symphony Financial Partners founder and CEO David Baran, was interviewed by Alicia Ogawa, director of the Project on Japanese Corporate Governance and Stewardship at Columbia University’s Business School, in a video shot just prior to the forum.
Asked about how he engages Japanese companies, Baran said there are plenty of very good Japanese companies trading at depressed prices. So, rather than getting confrontational with poorly run business, he tries to take a constructive approach. “Isn’t it easier to buy good companies that are trading at deep discounts and help the share price go up?”
Japanese companies aren’t broken, Baran noted, it’s the market that’s broken. “The function of the market as a battleground for discovering value [is broken] and the pricing doesn’t work,” he explained.
Changes that activist investors and corporate governance reforms seek will take time, and habitual practices are hard to break. Japanese companies are often faulted for sitting on too much cash, but Baran pointed out that this is the result of the administrative guidance the enterprises received from the government after the asset bubble of the 1980s burst.
Changing business culture takes time—particularly in Japan. “I think the fuse was lit, it’s just a very long fuse for a lot of these things,” Baran said. “You’re not just dumping a set of rules on the table. You’re saying, ‘Here’s the change in culture. Now you’ve got to learn to adapt to it; decide how you’re going to adopt it.’”
“Companies are living things,” Baran reminded attendees. His team meets with company leadership seven to 10 times a year, and often they are talking about the same topics. “When you leave, they’re like, ‘OK, now I need to absorb that.’ Your conversation does not stop when you walk out of the room.”
You need to take the long view in Japan, but change can accelerate once consensus is reached. “Nothing happens quickly—until it does,” Baran said. “You’re waiting and waiting and waiting … and then the next day you go from zero to 100 miles per hour in execution.”
Positive Response
The third active investor was Seth Fischer, founder and chief investment officer at Hong Kong-based Oasis Capital Management. He highlighted how shareholder activism during last year’s AGM season reached new heights as measured by the number of companies receiving shareholder proposals and the number of proposals submitted by funds, as well as the number of candidates proposed by directors.
In a whirlwind of slides, Fischer gave numerous specific examples of his fund’s engagement with several companies. At last year’s Mitsubishi Logistics AGM, Oasis urged the company to implement a buyback of five percent of its shares, and the company responded with a 5.8-percent buyback.
Oasis also proposed electing outside directors and abolishing the komon system—under which former presidents, chairs, and top executives stay on as senior advisors—a practice seen by many as a hindrance to innovation. The company abolished two komon posts.
Oasis has also been active in Tokyo Dome Corporation, which owns the home stadium of the Yomiuri Giants baseball team. A year-and-a-half ago, Oasis came forward with an asset-improvement plan that went through a “long and quite public engagement with the company,” Fischer explained. At an extraordinary general meeting, Oasis proposed removing three board members, two of whom had held their posts for at least 15 years. Tokyo Dome was taken private by Mitsui Fudosan Co., Ltd. and Yomiuri for a 45-percent premium, and Fischer said, “Our business plans are being fully implemented.”
This year, Oasis plans to submit proposals at the AGM of Tenma Corporation, a plastics manufacturer that has struggled with governance issues following a bribery scandal at one of its Vietnam subsidiaries. The incident has spurred a battle for control between two of the founding families, distracting the company from its main business operations. Fischer’s firm is proposing that three directors be elected to help unify the business “and improve governance at the company.”
Wrapping up the forum, Packard said a key takeaway from the diverse views shared was that, if “activism is viewed constructively and done properly, it can receive the support of management.”
