The Journal The Authority on Global Business in Japan

This year, Japanese listed companies have received a record 54 shareholder proposals at their annual general meetings (AGMs). These proposals reflect investor frustration with the slow pace of change at listed companies since the introduction of a corporate governance code in 2014.

On June 4, the American Chamber of Commerce in Japan (ACCJ) Alternative Investment Committee held its inaugural Shareholder Forum to explore the rise of actively engaged shareholders and their proposals. More than 100 members of the investment community and mainstream media met at the Tokyo Stock Exchange to listen to speakers from the Japanese government, corporate Japan, and investors.

Toshitake Inoue, director of the Corporate Accounting and Disclosure Division of Japan’s Financial Services Agency (FSA), explained the background to the updated Corporate Governance Code and the Stewardship Code, Japan’s guidance on investor responsibilities. These are part of the FSA’s efforts to improve corporate management, support investor engagement, and encourage constructive dialogue between companies and their investors. The aim of these codes is to enhance corporate disclosure and support long-term growth in corporate value.

Sojitz Corporation President and Chief Executive Officer Masayoshi Fujimoto described some of the issues facing Japanese companies and their relationships with shareholders. One of the key issues they face, as they strive to improve their governance by adding independent directors, is that the definition of “independent” is too strict and excludes some excellent candidates with business experience.

Reiwa Arrives
On May 1, Japan entered a new era. The old era of Heisei—sometimes referred to as “the lost decades”—is over, observed Takashi Hiroki from Monex. Despite the increase in stock prices in Japan over the past decade, the implementation of the Stewardship Code, and the gradual improvement of corporate governance, Japanese equities remain cheap and valuations low. Why? Here are four reasons:

  • Japanese companies are hoarding cash
  • There is little enthusiasm for corporate value creation
  • Companies appear to have little regard for the cost of capital
  • The process for selection of CEOs lacks transparency

Japanese companies lack “real governance,” Hiroki explained at the forum. CEOs lack experience, and companies are protected by cross shareholdings.

Shareholders can bring constructive change through enga­gement with management and by voting at the AGMs. Like actively engaged fund managers, Japanese retail investors should be more assertive, deliver their opinions to management.

Nicholas Smith (pictured above), a strategist at CLSA Securities Japan Co., Ltd., described the challenges shareholders have with corporate management, noting there is no tracking of proposals being brought to companies. All investors need to pay close attention to each company in which they invest and ensure that they are able to communicate on governance and management issues.

Smith showed that, even though 53 percent of Japanese stocks trade below book value, there are signs of improvement. Dividend yields have risen to levels similar to those in the United States, operating profits have risen, and stock buybacks are taking place—often as a result of investor pressure. However, important issues remain, such as cash hoarding and the large number of Japanese companies that own public equities valued higher than their own market capitalization.

Finally, three actively engaged investors described their activities this year. Hong Kong-based Oasis Management Company Ltd. outlined their proposals to Hazama Ando Corporation, one of Japan’s largest construction companies, that directors should be accountable for safety after a series of accidents where workers died.

Japanese investor Strategic Capital, Inc. explained their approach to companies—from private discussions to public proposals—and outlined the successes that have resulted from their 2019 proposals. Fir Tree Partners, speaking by video from New York, discussed proposals for JR Kyushu for a stock buyback program, increased use of leverage, and more independent directors.

Looking Ahead
The Japanese government is pushing for long-term growth in corporate value as a virtuous circle for the good of Japanese society. At the same time, there is still a long way to go.

Chris Wells, vice-chair of the Alternative Investment Committee, summarized the goals of the forum as the ACCJ’s attempt to address the lack of information about the existence of shareholder initiatives among listed companies. By directing a spotlight at the substance of these proposals and the changes shareholders are trying to bring about, the ACCJ wants to remove the excuse of lack of information about shareholder actions. Shareholders can make a difference.

Deborah Hayden is vice-chair of the ACCJ Alternative Investment Commitee and regional director, capital markets and M&A APAC, at Edelman Japan.