Japan Inc.'s New Focus on Shareholders Seen Coming From WithinDave McCombs and Kathleen Chu
A stewardship code introduced last year shows companies are now willing to accept being chastised by investors on bad management, said Baran, co-founder of Tokyo-based hedge fund Symphony Financial Partners, and an investor in Japan for three decades. That’s a big change from the history of companies shunning activist investor demands.
Most of Japan’s 225 biggest companies hold shareholder meetings this week and next for the first time under the code and another one on corporate governance introduced June 1. The voluntary guidelines reflect a new consensus against traditional practices such as stockpiling cash, insider-only boards and so-called cross-shareholdings that helped hold down return on equity at half the global average in the decade ending 2013.
“Our position has always been that you can’t force change in the Japanese equity market,” Baran said in an interview in Tokyo. “Change has to come from within.”
The stewardship code means investors attending shareholder meetings commit in writing to oppose measures that don’t enhance value. In the past, companies assumed their biggest shareholders among Japanese insurers, banks and pension funds would approve proxy statements regardless of the effect on returns.
Underscoring the trend, Institutional Shareholder Services Inc. is telling its 1,600 asset-manager clients to vote top executives out at firms that fail the proxy adviser’s new profitability standard.
The stewardship code is part of Prime Minister Shinzo Abe’s policies to make firms more profitable. They include forming a Tokyo Stock Exchange index that tracks companies focused on investors and profitability, and prompting companies to unwind shares they hold in each other to cement business ties, a long-held practice in corporate Japan.
The code was implemented by the country’s financial regulator on a “comply-or-explain” basis. The corporate governance code requires companies to set targets for ROE, improve transparency and take other steps to serve the interests of shareholders.
The stewardship code better reflects a consensus between companies and their shareholders, said Baran, who co-founded Symphony in 2000 after working as a proprietary trader at Goldman Sachs Japan Co. and Lehman Brothers Japan Inc. Symphony has about $700 million under management.
Baran joins other Japanese fund managers emboldened by the new guidelines to agitate for change. Naoki Fujiwara, who oversees about $6 billion for Shinkin Asset Management Co. in Tokyo, said he is now bringing up ROE whenever he meets executives for fear of investors deserting his fund, and will do so at the shareholder meetings this week.
The shift toward shareholder friendliness is attracting increasing attention as payouts rise and activists such New York-based Daniel Loeb pry loose cash from companies that have rebuffed similar attempts for decades. Loeb, founder of New York-based hedge fund Third Point LLC, persuaded robot-maker Fanuc Corp. to double the percentage of profit it would return to shareholders.
Changes are gradually already taking place and that will provide more opportunities for hedge-fund managers in Japan, said Ed Rogers, chief executive of Tokyo-based Rogers Investment Advisers.
“We have already started to see the effects of corporate governance changes, reflected in more active share buybacks, greater diversification of the board to include for example more female director and greater willingness to engage with activists such as Dan Loeb at Fanuc,” Rogers said.
Dividends and buybacks by Japanese companies almost doubled last fiscal year, jumping 76 percent to 12.8 trillion yen ($104 billion), according to Nomura Holdings Inc.
“Both investors and companies have to create an environment so that it is easy for people to invest their savings,” said Shuhei Abe, chief executive officer of Sparx Group Co. “The government encourages conversation between corporates and investors. If one doesn’t recognize the importance of this, they are heading in the opposite direction of the current trend.”
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