UBS Says Japan Cross-Shareholdings Show Manager Incompetence

  • Expects about $71 billion in share sales in next few years
  • Executives should use profit for buybacks, capital investments

Executives who still haven’t sold cross-shareholdings must be seen as incompetent, says the head of Japanese equities at UBS Group AG’s wealth management unit in Tokyo.

Companies should have taken profits on the shares they traditionally held in customers and business partners, Toru Ibayashi said in an interview. The Topix index has surged 72 percent under Prime Minister Shinzo Abe. Clinging to such holdings hinders the market’s allocation of funds in the economy, a role that should be filled by investment professionals, he said.

The decades-long practice has come under fire as the government pushes for better use of capital in a nation with an aging population and shrinking birthrate. While the three largest banks have already pledged to sell some holdings, UBS expects 8.5 trillion yen ($71 billion) more in such shares to be offloaded in the next few years.

"Executives who are unable to unwind cross-shareholdings have failed as managers,” Ibayashi said. “It shows they have no skill.”

The corporate-governance code Japan started in June presses companies to eliminate cross-shareholdings or explain the economic rationale for keeping them. For Ibayashi, failure to sell and use the proceeds for investment or to buy back shares signals managers have deserted their purpose of delivering returns to investors.

"Managers complain they don’t have money for buybacks, but they still have cross-held shares,” says Ibayashi. “They’ll be making a profit, so why aren’t they selling? This isn’t good corporate governance.”

Ibayashi calculates there is as much as 85 trillion yen in outstanding cross-shareholdings, and expects 10 percent of this to be unwound in coming years.

Keeping such shares was understandable in the past to avoid investment losses, he said. The Topix fell 76 percent from its peak in 1989 to a low in 2012. The equity gauge sank 3.9 percent as of 1:30 p.m. in Tokyo on Tuesday.

Japanese firms were sitting on 243 trillion yen of cash and deposits at the end of June, a record high, data from the Bank of Japan showed this month.

UBS picks Mizuho Financial Group Inc. as a top recommendation for more share buybacks, Ibayashi said, as the bank’s capital adequacy ratio is slightly lower than the other two Japanese megabanks, giving them more room to unwind cross-shareholdings and buy back shares. Mizuho reduced such holdings by 24.5 billion yen last quarter, about six times more than a year earlier, the lender said this month.

"Executives should return their focus to what their actual jobs are," Ibayashi said. “Their duty is to increase return on equity. They should manage their companies for shareholders.”

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