Apr 24 2019
Shareholder activism in Japan: the new global hotbed

In 2018, Asia eclipsed Europe (excl. the UK) for the first time in the number of activist campaigns. The clear hotbed is Japan where these campaigns increased by 40% to 47, more than in any other country outside the U.S. Dealing with the challenge to more pro-actively communicate with capital markets Japanese companies will provide a valuable lesson to their peers in Europe and Asia.

Corporate governance and shareholder activism

Looking at the case of Nissan and Carlos Ghosn, you might think of corporate governance in Japan as being somewhere between insufficient and appalling. But Nissan is certainly not the prototype of a Japanese firm, having a 40%+ major foreign shareholder and having been run by a foreigner for more than 18 years.

On April 10, I had the honor to moderate a panel on corporate governance and the rise of shareholder activism in Japan. The panel featured among others the two most outspoken activists in Japan, Seth Fischer of Hong Kong based Oasis Management and Tsuyoshi Maruki of Strategic Capital, the only self-declared confrontational activist based in Tokyo.

Apart from the Nissan case, all panelists agreed that the recent Corporate Governance and Stewardship Codes have improved overall corporate governance in Japan significantly. The cross-shareholding ratio, which tracks shareholdings listed between listed corporations, is down from 35% in the 1990s to less than 10%. Parent-subsidiary listings have decreased by 40% from the peak back in 2007.

More interestingly, all panelists stressed that activists now see much quicker reactions from management and more honesty in their dialogues with the CEOs and CFOs. Most importantly, these dialogues with management are more and more frequently followed by actual actions by the companies. Management seems to increasingly realize that a wait-and-see attitude does not help but is rather getting more and more dangerous – for the company but also for themselves.

Increasing media and public pressure

Both activists on the panel stressed that they increasingly use the media and other public pressure to drum up awareness and support for their suggestions in adjusting the strategic direction of their portfolio firms and sometimes also their management set-up. Indeed, Oasis is famous for its dedicated websites on single investment cases and high visibility PR campaigns.

But activists do not stop at public campaigns. Calls for extraordinary shareholder meetings and proxy voting are no longer just threats but have become a painful reality. This new reality arrived over the course of the last three years during which shareholder activism in Japan has really taken off.

The recent successful hostile take-over of Japan sportswear firm Descente by Itochu, the first of its kind in Japan, is another illustration that the gloves are finally coming off.

Specialist advisors in high demand

Until recently, financial advisors in Japan have mainly focused on supporting their clients in M&A transactions, in particular with a large number of big-scale overseas purchases. The focus however is shifting. Providing intelligence and quick meaningful support to their Japanese clients in dealing with activist shareholders has taken over as the new business focus and also as an important growth area.

The same applies for legal advisors and for PR advisors too as interactions between activists and company management increasingly leave the board room and more and more take place in the public. Add in the Abe government as a powerful promoter of increased corporate governance and there is little room for Japanese firms not to deal pro-actively with activist shareholders.

Divide between international and domestic institutional investors

Ultimately, the most powerful endorsers of activists are other shareholders. International investors and asset management firms are increasingly lining up behind the meaningful suggestions and demands of activists, happy to have found an outspoken voice working to eventually increase their returns and dividends.

The situation is, however, still different with most Japanese institutional investors, a point stressed by other participants of our April 10 panel. Ken Kiyohara, a veteran lawyer and founder of CMC Partners, noted the still rather passive action by most Japanese investors when compared to their international peers.

But even here all panelists agreed that this will only be a matter of time before pressure on management will also increase from these traditionally rather silent investors.

Lessons for foreign observers

A year ago, I wrote an opinion piece in Nikkei on what Japan can learn from Germany in terms of shareholder activism. In one or two years, it might be the other way around. Japan and its companies are experiencing a rise in shareholder activism at such high speed that new practices and rules of engagement will be increasingly defined here.

The, until now, locked and sometimes hidden value in so many firms will be systematically unearthed that Japan Inc. will likely look very different in a few years. Traditional companies like Olympus are rapidly transforming into truly global players benefitting from the additional expertise and experience brought in by an activist shareholder such as ValueAct as recently described in this WSJ article.

Challenges for proactive and professional communications with all stakeholders are rising rapidly in Japan but nowhere more than in dealing with increasingly demanding shareholders. This development will likely make Japan one of the most interesting places to observe, analyze and be active in.