When Rob Hardy, ESG corporate governance director at Capital Group, started going into Japanese engagement meetings in the late 90s, the management often couldn’t tell him where the share price currently sat.
‘You can’t imagine an American or British CEO not knowing what their share price is doing today. But there was a whole different mindset in those days, which I think has changed today,’ Hardy said.
There have been a number of positive changes since Hardy’s first involvement with Japanese shareholder voting back in 1996, which was partly prompted by the country’s adoption of new corporate governance and stewardship codes, resembling those in the UK, 10 years ago.
‘I am old enough to remember a time when you saw 40- or even 50-strong all-male executive boards. We are seeing more independent boards of directors, higher payout ratios and fewer poison pill anti-takeover defences, to name just a few’
Rob Hardy, ESG corporate governance director, Capital Group
‘I am old enough to remember a time when you saw 40 or even 50-strong all-male executive boards. We are seeing more independent boards of directors, higher payout ratios and fewer poison pill anti-takeover defences, to name just a few.’
Hardy is not the only one who’s noticed a major shift in corporate governance in Japan over the years.
Richard Kaye, manager of the Comgest Growth Japan fund, arrived in Japan in the 1990s, at a time when disclosures were very poor and companies were only communicating numbers for their Japanese headquarters.
‘A lot of these companies weren’t obliged to disclose overseas subsidiary figures, even though that sounds pretty strange.
‘You actually wouldn’t really know the whole picture for the company and could often get surprises because of liabilities that overseas subsidiaries might get,’ he said.
However, things have moved on over the years, and all listed companies now disclose their full consolidated figures and some even publish quarterly figures.
‘It is not about philosophy, it is about money. It is about greed, need; and those are very powerful drivers’
Richard Kaye, fund manager, Comgest
Domestic sentiment shift
Stewardship code and governance reforms have been key to the change in Japan’s corporate culture, but you can’t discard the role domestic investors played in the process, having become increasingly more active in the Japanese equity market in recent years.
‘The way I see Japan, foreigners can stand on soap boxes and shout: “this is how it is done in America!” Everyone is going to say: “well, that’s great, nothing to do with us”,’ Kaye said.
‘If domestic investors are asking for a different long-term relationship with the company that they have invested with, that has a really powerful effect.’
In Kaye’s view, the motivation behind the move is simple: institutional investors needed better returns. Kaye said for many years Japan’s fund management industry was not very sophisticated, with many people doing jobs in the sector on rotation.
‘These were never considered lifetime careers. But that is changing and there is a greater focus on returns.’
Another major factor, he said, is that more Japanese people are retiring, so pension plans need to look for more options to address their needs.
‘This is driving a much bigger focus on returns and a much more professional long-term structured investment by the domestic pension fund industry.
‘It is not about philosophy, it is about money. It is about greed, need; and those are very powerful drivers,’ he said.
‘The average age of directors in Japan is 59.5 years old, and from this point on, the pool of female human capital at the appropriate age for directors in Japan will become broader’
Yu Shimizu, fund manager, Sparx Asset Management
Moving away from cross-shareholdings
Despite positive strides, Japanese companies are still struggling with corporate governance challenges, including local phenomena, such as cross-shareholdings.
Thirty years ago, industrial groups like Toshiba and Mitsubishi often held each other’s shares, which made it difficult for outside shareholders to have an influence. In addition, some major banks in the country also invested in the same names, isolating foreign investors even further.
‘From a capital allocation standpoint, this was not the best deployment of capital and I think shareholders like us have been engaging for some time to try and unwind some of these,’ Capital Group’s Hardy said.
‘There was a time when even reducing a single share was unthinkable but today many companies are approaching the big industrial groups to get permission to sell. This enabled us to start to have a conversation,’ he said.
Yu Shimizu, manager of the Sparx Japan Equity Sustainable All Cap Ucits fund, said some of his invested companies are already reducing their cross-shareholdings by selling their shares, which is not only good for their governance but also for their cash levels.
He gave an example of Tokio Marine Holdings, which has approximately ¥2tn (€14bn) in cross-shareholdings in listed companies.
‘The company plans to sell these shares at a rate of ¥100bn per year and use the proceeds for M&A and share buybacks.
‘Taking advantage of this situation, Tokio Marine Holdings has continued to grow by acquiring overseas insurance companies and enjoying the risk reduction benefits of diversifying its insurance underwriting,’ he added.
However, there is still more work to be done. Anna Hirai, global ESG analyst at LGIM, said reducing cross-shareholdings remains a challenge for many Japanese companies, including big banks in Japan, who are the worst offenders.
‘Although we welcome Japanese banks’ public commitment to reduce cross-shareholdings, we will continue to engage with Japanese companies to monitor progress and vote against the board chair if companies allocate 20% or more of their net assets to cross holdings,’ Hirai said.
‘Although we welcome Japanese banks’ public commitment to reduce cross-shareholdings, we will continue to engage with Japanese companies to monitor progress and vote against the board chair if companies allocate 20% or more of their net assets to cross holdings’
Anna Hirai, global ESG analyst, LGIM
Challenges ahead
The gender balance of boards is another sticking point, especially as Japanese companies are historically male-dominated and don’t want to go down the quota route.
According to an OECD survey, the percentage of female board members in Japan’s 50 largest companies is 12.6%, far behind the more than 30% figure in Europe. The figure declines further to 7.5% when all listed companies are considered.
Sparx’s Shimizu said this figure may seem alarming in a side-by-side comparison, but looking at a time series reveals a different picture, with the figure remaining flat at 1% until 2013.
‘This is strongly influenced by governance reforms, but another key factor is the increase in the number of female human capital at the senior level,’ he said.
The Equal Employment Opportunity Law was enacted in Japan in 1986, which means those who graduated from college at the age of 22 in that year are now 58 years old.
‘The average age of directors in Japan is 59.5 years old, and from this point on, the pool of female human capital at the appropriate age for directors in Japan will become broader,’ he added.
Comgest’s Kaye has also noticed a positive dynamic on the gender representation front. He gave maternity products producer Pigeon as an example, with the asset manager pushing the firm to have a woman on its board, given women are the firm’s key customers.
Pigeon finally hired a woman – Atsuko Taishido –in 2021 and came to Comgest’s office to explain why it made the hire and why she had the relevant governance skills and the ability to contradict the management.
‘It was in many ways a very important addition to the board. She was not a token woman, she was an important enrichment of Pigeon’s management,’ Kaye said.
With all the challenges that corporate Japan is still facing, it is important for foreign investors to recognise that the change is not going to happen overnight and, given that the country’s culture is different, it will take longer for businesses to understand and act on investors’ demands.