The Journal The Authority on Global Business in Japan

In addition to the unexpected twists and turns of operating during the coronavirus pandemic, companies in Japan must also come to understand changes in financial laws as they navigate a very interesting shareholder meeting season.

On June 2, the American Chamber of Commerce in Japan (ACCJ) Alternative Investment Committee (AIC) hosted the second annual ACCJ Shareholder Forum. The virtual event brought together five speakers with expert knowledge of the fiduciary and regulatory landscape:

  • Ryohei Yanagi, CFO, Eisai Pharmaceutical Co., Ltd. 
  • Nicholas Smith, strategist, CLSA Securities Japan Co., Ltd.
  • Emi Onozuka, COO, Japan Catalyst, Inc.
  • Fabiana Fedeli, global head of fundamental equities, Robeco Institutional Asset Management 
  • Seth Fischer, CIO, 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. The discussion included views about the impact on foreign investors of reporting and notification changes, the appropriate roles of asset managers and owners in revitalizing public Japanese companies, how the corporate and management landscapes are evolving in the coronavirus eco­nomy, and key strategies to address investor stewardship in Japan.

Frank Packard

AIC Chair Frank Packard delivered opening remarks and Vice-Chair Christopher Wells established the theme for the day. “You may recall that, last year, I mentioned that it took Frank and me almost five years of discussions and planning to get the first forum off the ground. Now we’re only in our second year, and we’re challenged by Covid-19. But we’re tough and we’re going to keep doing this, hopefully indefinitely into the future.

Christopher Wells

“Frank and I had been planning this year’s forum since last autumn, and we had even secured the Tokyo Stock Exchange once again as the venue. But all that changed with the dra­matic spread of Covid-19 and the need to shelter in place. Never­theless, a virtual environment has certain benefits to the ability to include investors from other parts of the world, and will help to spread the message of the need for active shareholder and buyer involvement in the stewardship of Japanese companies.”

To establish the framework for the forum, Wells outlined three developments over the past year that have impacted the dialogue on stewardship:

  • Coronavirus impact on annual general meetings (AGMs)
  • Increased environmental, social, and governance (ESG)
  • Foreign Exchange and Foreign Trade Law (FEFTA) changes

Japan has amended FEFTA to require prior notification of investments greater than one percent by foreign investors. The changes vastly increase the number of listed companies deemed essential to national security and amend the regulations for reporting foreign investment rules for these companies—something that has raised concerns in the forum.

“This negative impression of these changes was reinforced by required prior approvals for shareholders to exercise their fundamental voting rights on specific shareholder initiatives by topic, which suggested to many of the foreign observers that industrial policy—rather than national security objectives—were paramount in making the changes,” Wells explained. “While the creation of certain exemptions from that reporting has eased anxieties among foreign investors, there remains a concern that these new rules will undermine stewardship initiatives aimed at improved management performance, and will make investing in Japan significantly less attractive over the long term.”

Wells said the forum continues to believe that the result of active shareholder engagement will be a virtuous cycle, and a win–win for all stakeholders, including employees, present and future management of Japanese corporations, and the financial interests of the shareholders themselves.

After Wells’ remarks, the Forum received a keynote address from the Ministry of Finance’s Hideaki Imamura, director of the Research Division, International Bureau. He gave a presentation on the revisions to FEFTA.

Ryohei Yanagi, who, in addition to his role as CFO of Eisai is a visiting professor at Waseda University, delivered a presentation entitled Proving the Relevance between ESG and Corporate Value in Engagement.

Referencing a model from the International Integrated Reporting Council tied to Japan’s price-to-book value ratio (PBR), he asked how much cash a company should keep on hand to cope with unexpected circumstances such as the coronavirus pandemic.

Ryohei Yanagi

“I set aside three months’ equivalent cash holdings on our balance sheet to cope with CCC, which stands for cash conversion cycle,” Yanagi said. “In addition, as a contingency plan, it is advisable to secure lines of credit with Japanese banks for an additional three months’ sales equivalent.”

He pointed out that some Japanese companies have accu­mulated cash stockpiles far exceeding their annual sales. Some 300 companies—nearly 10 percent of the listed com­panies—have net cash greater than their market cap.

“A lot of Japanese management are walking around Marunouchi very proudly wearing United Nations Strategic Development Goals badges, but their ROI is very low, their PBR is very low. My answer is: let’s prove the relevance between ESG and value creation in our active engagement with evidence. Why don’t we stop ambiguous, emotional language about ESG? We should show the money, show the evidence.

Next, CLSA Securities Japan strategist Nicholas Smith talked about how the economic challenges brought on by the corona­virus have affected the Japanese market and the potential for investor activism.

“For the past few years, quality has outperformed,” he said. “Quality is defined as high-return-on-equity companies whose earnings are not strongly dependent on the business cycle. They tend to be cash rich.” Almost 56 percent of non-financials listed on the Tokyo Stock Price Index are now net cash, Smith said, compared with just 16 percent on the US S&P 500.

He explained that cash-rich companies have been strongly outperforming highly leveraged companies this year, the reason largely being cash burn due to the coronavirus pandemic. But the crisis has had an unusual effect on Japan’s business market.

“While US stocks had enjoyed even greater multiple expan­sion, Japan has seen relentless multiple compression. Japanese valuations are tightly correlated with foreign buying, and foreign investors are now heavily underweighting Japan,” said Smith, who noted that this is strange given there are few countries that have been as lightly touched by Covid-19.

“Listed Japan is bloated with excess cash. That’s a valuable cushion in the recession. Share buybacks in the United States have depleted the cushion there. Many are uncomfortable about permitting companies that have done huge share buybacks to access bailout money from the public purse,” he explained.

Even more small companies in Japan are cash rich, he added, making the country a target-rich environment for activists.

“I can show you reams of small companies that are trading at less than cash or less than equity holdings on their balance sheets. They’ve got negative enterprise value. Imagine a store where lots of products have cash-back coupons worth more than their share-price tags. The Tokyo Stock Exchange is just such a store, and anyone is allowed to shop.”

Currently, Japanese banks are only lending out about two-thirds of their deposits. Smith said this means companies can afford to take the excess cash off their balance sheets, because the banks are desperate for new borrowers.

“Money without velocity has a discounted value. So, it shouldn’t be a surprise that as much as 52 percent of stocks are now trading below not just book but below tangible book in Japan. The accounting book value of a company can be polluted with fanciful values for goodwill. Tangible book, however, is physical stuff—things you can stub your toe on or, more profitably, sell off to generate cash that can be put to work. That’s what the activists are trying to get companies to do.”

For this reason, Smith said, investors prepared to engage with companies in Japan have a huge target-rich environment to work with. “Global activists and private equity companies have scrambled to build operations here, making it the second-biggest market for activism behind the United States.”

Japan Catalyst’s Emi Onozuka pulled together the themes covered by Yanagi and Smith as she talked about how Covid-19 is impacting investor activism.

“The greatest public health and economic crisis of recent history has made us all—namely investors, corporates, and governments—realize that we need to approach business and life differently,” she said. “Today, however, I want to take this opportunity to reiterate what has not changed—from an investor point of view—especially when we want to revitalize and transform Japanese capital markets through investments that create true long-term return.

“Because we’re facing this unique time—especially in Japan—together with other regulatory changes such as FEFTA, we believe that shareholders need to set clear expectations and provide a timeline by differentiating the short-term expectations versus the long term,” she continued. “For companies, they need to provide more transparency and explanations about their accountability through documentation and top-management communications. This will create a basis for a dialogue to achieve short-term recovery and long-term growth.”

Onozuka asked three key questions:

  • What are investors looking for during the crisis?
  • What are regulators looking to do in terms support?
  • What have Japanese corporations realized?

“Many investors that I talk to say that this is a great test to see if a company is resilient, which means not only that they have immediate means to survive and keep employees, but have a business model and operational base that makes sense during and post crisis,” she said.

As an example, she cited a statement from the International Corporate Governance Network, which says that it is the com­pany’s responsibility to prioritize employee safety and welfare, pursue a long-term view on social responsibilities, take holistic and equitable approaches to capital allocation decisions, and communicate comprehensively.

And an example from the domestic industry group Institutional Investors Collective Engagement Forum notes that the post-pandemic era will likely call for further digita­lization and corporate behavioral changes to increase the efficiency and resilience of business models.

In terms of regulators and what they are looking to do in relation to Covid-19 emergency support and fiscal recovery packages, Onozuka said the hidden question is whether there has been a change in environmental stewardship and climate transition measures due to a focus on social capital.

“A simple answer is no, given measures taken by different regulators,” she said, citing conditions placed on a massive rescue measure by the French government—a state-backed loan of €4 billion to Air France—that demand the airline’s overall carbon dioxide emission per passenger kilometer be cut in half by 2030, compared with 2015 levels. Air France is also being asked to renew its fleet with more efficient aircraft and to commit to sourcing two percent of fuel from sustainable sources by 2025.

“Looking ahead to midterm recovery measures, most of the climate and environmental ministers in the 27-nation European Union back putting the European Green Deal at the heart of the post-coronavirus world,” she said. “The statement by the group notes that this moment of recovery will be an opportunity to rethink our society and develop a new model for prosperity that is more resilient, protective, sovereign, and inclusive.”

The Japanese government’s plan is not as clear as that of the EU, she said, but key messages were part of the April 20 decision on an emergency economic recovery package. The measure includes ¥48.4 trillion in direct fiscal spending, as well as a ¥117.1 trillion economic package to prevent the spread of infection, support employment and business continuity, boost economic recovery, and build a more resilient economic system. 

Key steps include:

  • Supply chain rebuilding
  • Agricultural product exports
  • Digital transformation
  • Accelerated decarbonization

Through these measures, the Japanese government believes it can foster midterm and sustainable long-term growth, she said.

What have Japanese corporations realized as a result of the crisis? It has been a wake-up call for the senior management of many Japanese companies to realize that international, behav­ioral, and process changes are needed if they are to survive.

“In the years to come, the new normal will continue to be mindful of social interactions and workstyle flexibility, efficiency, and productivity—all of which is centered on the wellbeing of humankind,” Onozuka said. She then cited Nidec Corporation CEO Shigenobu Nagamori, who is famous for leading the company with his hard-working style. In the face of the coronavirus, he admitted that the most important thing is his employees’ wellbeing, as well as increasing productivity, and that some of the beliefs that he has long held have become obsolete.

The post-Covid-19 landscape, Onozuka believes, will be a chance for Japanese companies to carry out digital trans­formation and pay for performance. Both are behavioral and operational changes. “I would like to say that investors will likely be no different to pre-crisis. If any different, investors will look more to material areas of companies’ sustainable growth, and proper stakeholder value, which will likely be supported by the government’s economic growth strategy.”

Robeco Institutional Asset Management’s Fabiana Fedeli spoke next and covered shareholder engagement in Japan.

“An engagement program is a structured program that needs to be thought through, and that does take a lot of resources,” she said. “We need to appreciate how many times companies get letters from investors with diverse and unstruc­tured requests. I would find that very difficult, if I were in their shoes, to deal with. When we start an engagement program, it is a structured one that is very thought out. We do believe the endpoint will be successful for the company, as it will help the long-term health and sustainability of their business, which, as long-term investors, is our goal.”

Fedeli explained Robeco’s process:

  • Start by selecting stocks for engagement
  • Request information from companies
  • Gather publicly available information
  • Begin intensive engagement program
  • Monitor results and record the progress
  • Ensure a consistent feedback loop
  • Adjust investment decisions based on results

In terms of working with a company’s board of directors, Fedeli noted that the role of the board in Japan is often different from in the West. In Japan, a board seems to have many more operational tasks, whereas in Western countries it is often where you go when you want to set targets, governance policy, or broad strategy—abilities that Robeco particularly values.

She also had advice for those preparing to engage with Japanese companies, a process that flows differently elsewhere.

“First and foremost, it’s really important to be aware of cultural differences in Japan. It’s really important to start building up a good relationship with companies. You can’t really call a com­pany, cold turkey, and just say, ‘We’re investing in your stock, we would like to start a conversation.’ Generally, you start with an introduction from the portfolio manager or analyst. You get to know each other, you have a lot more face-to-face meetings, and there’s a lot more time spent actually explaining the course of action and goals.”

And, she added, having very clear objectives and giving feedback to the companies with which you engage is really essential for constructive dialogue.

To close out the forum, Oasis Management Company’s Seth Fischer talked about Japan’s 2020 proxy season and governance in the time of coronavirus.

“We’ve been investing in and engaged with Japanese com­panies for the past 18 years,” he said of Oasis’s role in the market. “In fulfillment of our duties under Japan’s stewardship code, we’re committed to strategic engagement, when necessary, to improve our investee companies’ long-term value. We strive for our engagements to lead to increased earnings, improved corporate governance, and enhanced corporate values.”

For the June 2020 AGM season, Oasis has proxies with:

  • Fujitec Co., Ltd.
  • Mitsubishi Logistics, Inc.
  • Hazama Ando Corporation

“These companies have all failed to significantly address business and governance concerns, and they all share charac­teristics of entrenched, cozy, and complacent management that is not striving to increase corporate value for shareholders,” Fischer said.

As an example of poor governance at Hazama Ando, one of Japan’s largest general construction companies, Fischer pointed out the same issue as Smith: hoarding cash. With cash accounting for 83 percent of the company’s market cap, and cash plus securities making up 100 percent of the treasury-adjusted market cap, Hazama Ando’s PE ratio adjusted for next cash is 1.1. That’s just 10 percent of competitor Nishimatsu Construction Co., Ltd. (10.1).

The choices of what to do with that enormous amount of cash have also raised concerns. Hazama Ando announced in February that they will invest ¥100 billion in real estate and power projects. “Both are businesses they are not in­volved in, that are not core to their business. We suggested they buy back their own stock at 1.1 times PE,” Fischer said, explaining that Oasis has asked this year for implementation of a 9.98-percent share buyback (¥17 billion) and revisions to the articles of incorporation.

Another example Fischer gave relates to investment in tech­nology. Oasis has recommended to Mitsubishi Logistics that two independent directors with very strong logistics experience be added to help the company increase margins.

“We believe the company can increase margins dramatically if they invest in technology, robotics, and automation within their logistics processes,” Fischer said, adding that the two directors being recommended have ideal experience to make this technology shift happen successfully. “All their clients are going to benefit dramatically from the increased speed and efficiency of increased technology and robotics within the logistics sector.”

Frank Packard and Christopher Wells
Chair and vice-chair
Alternative Investment Committee

Ryohei Yanagi
Eisai Pharmaceutical Co., Ltd.

Nicholas Smith
CLSA Securities Japan Co., Ltd.

Emi Onozuka
Japan Catalyst, Inc.

Fabiana Fedeli
Global head of fundamental equities
Robeco Institutional Asset Management

Seth Fischer
Oasis Management Company, Ltd.


Christopher Bryan Jones is Editor-in-Chief of The ACCJ Journal. Originally from Birmingham, Alabama, he has lived in Japan since 1997.
Having very clear objectives and giving feedback to the companies with which you engage is really essential for constructive dialogue.