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Freshfields Transactions

| 2 minutes read

Shareholder activism in Japan: Part 4 – strategies, defenses and outlook

In the final part of our blog series on shareholder activism in Japan, we wrap things up by showing the current activist shareholder playbook and mapping the future trajectory of activism in Japan.

Activist strategies in Japan are increasingly reflecting the "playbook" employed by activist shareholders in other jurisdictions. Pressure usually starts in private following the acquisition of shares in addition to the activists’ existing stake. We do see, however, a spectrum of shareholder activism, from the "active" shareholder to the "activist" shareholder, as illustrated in the chart below.

We believe that:

  • The lines between activism (waging war) and stewardship (engaging) in Japan may become blurred, particularly as it relates to global trends such as environmental, social and governance (ESG) considerations. In particular, we expect there will be more of an emphasis on human capital management (HCM), especially in light of COVID-19, as poor HCM practices have been associated with higher employee attrition rates and reduced productivity and product quality. We are already seeing this trend in Europe and the US.
  • As these trends grow, we expect that there will be a more collaborative view among investors, increased willingness to conduct engagement, and more vigorously voiced expectations regarding how companies engage with their shareholder base. There will be an increase in campaign by "wolf pack" activists who seek institutional support early on.
  • At the same time, some of the old ways of companies relying on their shareholder bases are eroding – long-standing relationships between stakeholders (e.g. suppliers, customers, banks and other affiliated entities) in Japan will eventually diminish given the recent momentum to reduce conflicted interests.
  • In line with recent trends in the United States and Europe, but reinforced by Japanese culture, we will continue to see more private outreach to companies before activists seek publicity. Sometimes this even takes place before a big stake is acquired as a "feeling out" strategy. At the same time, there will be a moderate increase in hostile public campaigns as the activist shareholder culture becomes more accepted in Japan.

Taken together, these trends will force Japanese companies to face changes head on, and it is likely that significant change is on the horizon and moving quickly. The companies that are prepared, understand the risks, challenges and opportunities, and begin preparation in the near term will be best suited to adapt. It is also likely that, as a company falls further behind in its own adaptation, the failure to change will be its own self-fulfilling prophecy, and attract the kind of attention and investment that is most disruptive.

We have found in the United States and Europe that the companies that view activism preparedness as an opportunity to focus and engage on a well-communicated long-term strategy plan are in the best position to have the support of their shareholders and are overall best prepared for potential public activist engagement. However, Japanese corporate culture remains reactive in the face of shareholder activism and, in many cases, management does not prepare the company for potential attacks.

This may change given the increasing volume of activity and Japan Inc’s growing awareness of activism. We recommend Japanese companies adopt and engage in a tested, and well-proven preparatory plan. It will require a shift in the expectations of boards and management in the short-term, but it is likely that the shift is coming and can be driven through company initiative or third parties.

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


asia-pacific, corporate governance