Shareholder Activism

Japan - Abe’s reforms open a door

Building on his 2012 election promise to revitalize Japan, Prime Minister Shinzo Abe launched a series of reforms that includes significant changes in corporate governance, potentially permitting greater pressure from shareholders.

With a new Corporate Governance Code, Stewardship Code (aimed at investors), and amendments to the Company Act, Abe hopes to force market discipline on company management. By themselves these measures won’t bring a rapid rise in US-style activist shareholder campaigns, but they are a first step.

The new rules do help unlock an important door for foreign investors, who now own more than 30 percent of all listed shares in Japan. Foreign activists are very likely to succeed in prying higher dividends and share buybacks out of cash-rich Japanese companies. Dan Loeb’s Third Point has had some much-noticed success already with challenges to Sony and robot-maker Fanuc. However, activists’ ability to promote long-term change in corporate restructuring and board function will be very weak for a long time to come.

Popular practices that helped drive Japan’s economic boom in the 1970s and ’80s are now regarded by Abe and others to be a cause of the country’s sclerosis. These include the commitment to lifetime employment, limiting ownership of shares to passive and friendly investors, and preventing outsiders from joining corporate boards.

The typical Japanese company is a tightly knit family, favoring the stakeholders most directly involved in the business – particularly customers and workers. A 2013 survey by the Ministry of Economy, Trade and Industry ranked management’s top three stakeholder priorities. Ninety percent put customers first, while only 8 percent identified foreign investors as a priority.

Abe’s new rules may help change that culture, but adoption will be slow and companies may opt out of compliance if they can offer a reasonable justification. One change in particular seeks to move companies toward a US-style corporate structure by requiring that outside directors serve on auditing, nominating and compensation committees. Traditionally, Japanese companies strongly favor insider control. An amendment to the Company Act offers a compromise that puts outside directors on a single audit committee with supervisory functions that include nominations and compensation.

Corporate governance is being hailed as Abe’s signature accomplishment. Getting such a contentious item on the political agenda at all is significant, a signal of the potential for change. Given entrenched resistance however, true structural reform will be a difficult, painful and slow process.

Alicia Ogawa is a consultant to international investment funds and a senior adviser to the Center on Japanese Economy and Business at Columbia Business School. She was previously Managing Director at Lehman Brothers in charge of Global Equity Research and Director of Research at Nikko Salomon Smith Barney.

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