Japan has traditionally followed a structure that favors employees over economic growth and shareholder expenses. This system ensures the protection of managers from external factors such as company cross-holdings. The country’s court system too has shown bias against investment funds throughout its history. Shareholder activism could be the key to addressing this side of the Japanese culture. Prime Minister Shareholder activism features prominently in Shinzo Abe’s corporate governance reforms.
Changing the Shareholder Activist’s Approach
The Japanese corporate sector’s downturn in the 80s was partly due to the government’s short sightedness. Abe’s administration is attempting to do just the opposite and is encouraging various methods of dynamism. This includes, as previously indicated, a governance approach that is shareholder friendly and demands more participation from a company’s institutional investors.
Local culture’s historical preferences weren’t always open to this approach. Therefore, it will take time before companies allow institutional investors to play a significant role in the governance process. In the early 2000s, several activists were rather confrontational in targeting Japanese-listed companies, an approach similar to that in the United States. These included Japanese funds like Murakami and Steel Partners and TCI from the West. Despite the limits of corporate governance, companies perceived the activists as bullies and pariahs.
In order to become a viable solution for companies, shareholder activists changed their approach. Activists now are much more friendly, and they are seen as constructive rather than aggressive. Their tactic is humble and low-key. Instead of debating in public, discussions are kept behind closed doors. The activists also take time to gain the trust of company’s senior managers. They do not ask for board seats but instead win them over through contacts and information the company can actually use. These include a wide network of promising partners and disclosing thoroughly researched analysis on the company’s situation.
The Interest of Foreign Investors
Abe’s administration has enabled smaller funds to introduce the shareholder-friendly corporate agenda. These funds are primarily foreign and independent of the biggest Japanese institutions. The administration doesn’t seem to mind that majority of stakeholders in this approach are not from Japan’s own top companies. Japan’s biggest pension fund, GPIF (also managed by the government) invested in the American activist fund, Taiyo Pacific. This fund is making investments in Japanese companies. Abe even met with Dan Loeb, a renowned American investor, hedge fund manager, and philanthropist, in this regard.
Abe’s corporate Governance and Stewardship Codes has also increased the number of constructive activists in the country. This policy helps activists emphasize that their intentions and plans are in line with the government’s plans and shareholder interest.
But despite the change in approach and attitude, many non-believers see the downside in the listed companies having limited participation and corporate pension plans having low adoption rates due to the Stewardship Code. Many listed companies also still resist the presence of shareholder activists. Cross-holdings have also been set to prevent potential takeovers from outside shareholders and investors. On the other hand, there are numbers that show significant progress. The percentage of companies on level 1 of the Tokyo Stock Exchange has increased from 17% in 2012 to 88% in 2016.
Shareholder activism has shown promise in executing the potential success of corporate government reforms. Misaki Capital was able to help Sangetsu improve its capital efficiency and investor relations. Discretion and design is responsible for these changes. There is certainly a lot of promise as Japan slowly lets this change transform its own corporations.