Activist funds have been active in Japan for the past 15 years, targeting two types of companies: underperforming and cash rich ones with trapped assets, and those with listed subsidiaries. In response to actual and threatened shareholder proposals, Japanese companies have compromised, but progress has been slow and timid. No hostile takeover has ever succeeded by a single-digit activist investor. Last year, none of the shareholder proposals filed by activists got enough votes to win.
Lack of truly independent directors
Japan’s corporate ecosystem is sheltered by corporate shareholding structures (many companies are owned by allegiant, stable, friendly parties where the role of a shareholder is subordinated to the role of a transaction partner), a lack of truly independent directors, a judicial system that is conservative and timid in challenging board decisions, and a lack of mercenary management talent available to manage a company even if a hostile takeover was completed. Obstacles to change are deeply rooted in Japanese culture and history (resistance to outsiders, socialisation of risk, risk aversion, mistrust of the free market). Contributing to this is an education system that breeds intellectual conformity and does not encourage “out of the box” thinking. Management teams are missing the incentives for good corporate governance because there is no real takeover threat and equity finance is dead as a result of Japan’s zero interest-rate policy.
Progress towards better governance
Despite the rather depressing history, there has been some progress towards better governance. The election of Prime Minister Shinzo Abe in 2012 and the adoption of his third arrow of Abenomics (structural reform) have led to corporate governance reform by serendipity via the introduction of soft rules such as the Companies Act, Stewardship Code and Corporate Governance Code. These rules have become an essential part of the activist tool-kit in Japan. There has been a gradual unwinding of the cross shareholdings within certain Japanese corporates; however this process is far from complete.
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