Shareholder activism in Japan: Part 1 – history

The perception of shareholder activism is undergoing rapid change in Japan. Traditional financial shareholder activists and their familiar tactics that have been well-known to US and European companies were largely unheard of in Japan until recently. Traditional activists have historically been seen as "foreign vultures" that lacked understanding of corporate culture and the support of Japanese stakeholders. Now, traditional financial activism is being heralded in some circles as bringing positive change to a corporate landscape in need of change.

This blog is the first in a four-part series on shareholder activism in Japan. The series will explore:

1. the history of shareholder activism in Japan;
2. the changing face of shareholder activism in Japan and recent trends;
3. the Japanese legal landscape; and
4. strategies, defenses and outlook.

Key takeaways from this blog series

• The perception of shareholder activism in Japan is changing – from activists being seen as "foreign vultures" to agents of positive change.
• Whilst there is no data available, it has been widely reported that a large portion of activist interventions are closed engagements. Few make it so far as a proxy fight.
• Of those that do proceed to a proxy contest, few are pursued by foreign activists. Possible reasons include:
  • cultural differences (which are slowly beginning to dwindle); and
  • foreign activists "learning" how to proceed with a new kind of activism in Japan.

The history of shareholder activism in Japan

Japanese public companies typically have a complex corporate governance structure that is unique to Japan. This structure is largely a hangover from a bank-based economy where multiple stakeholders are shareholders and cross-shareholding is common. The stakeholder model that is trending in the United States is interwoven in the fabric of the Japanese corporate ecosystem – public companies routinely have their suppliers, customers, banks and other affiliated entities also listed on their shareholder register. Shareholders have dual interests – returns as an investor, but also maintenance of good business relationships, which often trumps their investor interests. As a result, corporate governance has been deprioritized for years.

Traditional financial activists, therefore, have had difficulty gaining acceptance and footing. The perception that financial shareholder activists have a short-term focus has been an impediment to gain the support of shareholder bases that prioritize long-term relationships, even at the detriment of short-term gains, and in fact, in some cases, with tolerance of potential shorter-term inefficiency. For instance, calls to return capital through dividends or share buybacks, common tactics in particular of US-style activists, do not resonate with companies or their stakeholders and have not customarily been heard in the Japanese shareholder community, let alone heeded by Japanese corporations.

Breaking the mould

The first significant rupture to the traditional corporate-stakeholder model occurred in 2015 under former Japanese Prime Minister Abe's administration. One of Abe’s key pledges was to make Japan a global economic powerhouse and, he argued, Japanese companies had to improve their corporate governance to compete on a global stage and attract global investment. There have been four significant regulatory changes in the last five years that have signalled a movement towards independent governance oversight and structures.

Companies Act (CA) – 2015 amendments

In 2015, the CA was amended primarily with a view to enhancing corporate governance. This was the first large-scale amendment of the CA since it was enacted in 2005.

There were two key changes affecting corporate governance:

• An enhanced definition of independent directors was established and if large companies do not have any independent directors, they need to explain why.
• A new governance structure became available to companies, comprising an audit/supervisory committee. The role of the audit/supervisory committee is to audit the activities of the directors, and the majority of its members have to be independent directors.

Corporate Governance Code (CGC) – enacted in 2015, revised in 2018

Similar to the UK’s code, the CGC was designed to have a principle-based, not a rule-based, approach. The CGC was not legally binding but introduced the concept of ‘comply or explain’ – listed companies should disclose policies regarding cross-shareholdings and conflicts, for example. In 2018, the CGC was revised and now states more plainly that "policy and concepts concerning reduction of cross-shareholdings etc. should be disclosed." The 2018 revisions to the CGC also introduced the concept of shareholder engagement under a Japanese framework, encouraging companies to engage with shareholders (if reasonable). Additionally, boards of directors should establish related engagement and other governance policies and organizational structures.

Japanese Stewardship Code (SSC) – enacted in 2014, revised in 2017

While the amended CA and CGC focus on company structure and behavior, the SSC focuses on expectations for investors. The SSC states that institutional investors should disclose each company they invest in and how they exercised their voting rights on each proposal in its immediately preceding fiscal year. It also specifies that it would be beneficial for institutional investors to engage with investee companies in collaboration with other investors (collective engagement) as necessary.

Corporate Office Decree on Disclosure of Corporate Details – revised in 2019

This decree requires disclosure in the company’s annual securities report of methods for examining the rationale of cross-shareholdings. The securities reports must also include the 60 largest stakes a company holds, up from 30 previously, in addition to stating whether any of these stakes are cross-shareholdings.

We will do a deep dive in the next part of our blog series and chart how the shareholder activism landscape is rapidly changing in Japan.

For those who wish to continue reading, the consolidated version of all four blog posts is available in the below PDF.