Japan’s benchmark index hit a record earlier this year supported by a key pillar — better corporate governance.
The country’s government has been encouraging companies to improve their focus on shareholders for the better part of a decade. The trend got a major boost two years ago when the Tokyo Stock Exchange also started pressuring company executives to boost returns for shareholders.
Japanese companies are returning more cash to shareholders, have boosted the number of women on corporate boards, have grown more open to working with activist investors and they have whittled away at their penchant for cross-shareholding. Additionally, investors are more willing to challenge management at shareholders’ meetings.
“Foreign investors have noticed significant advancements in Japanese firms, fueled by enhanced corporate governance standards and efforts by the Tokyo Stock Exchange to boost corporate stewardship,” said Ernst Glanzmann, Investment Director, Japan Equities, GAM Investments. “These improvements, along with a heightened emphasis on the cost of capital and a more shareholder-friendly approach to capital usage, have helped the recent rally.”
The following graphs show how corporate governance has changed in the country.
More Money for Shareholders
Once known for low dividend payouts and limited share buybacks, Japanese companies have steadily increased the amount of cash they pay out to shareholders in recent years.
Their dividends are estimated to have risen to ¥19 trillion in the financial year to March 2023, more than doubling from around ¥8 trillion ten years ago, according to data compiled by Okasan Securities. The dividend payout ratio has also risen to 36% from around 26% during the same period.
Share buybacks have hit almost ¥10 trillion, a five-fold increase from a decade ago.
Putting both together, the total payout ratio, or the percentage of money companies send back to shareholders from net income, was estimated to be 53% last financial year, up from 35% in fiscal year 2013.
Activists
Some investors think there’s room for the payout ratio to rise.
Activist investors are increasingly targeting Japanese companies. In part, they are drawn by the substantial cash cushions that Japanese firms have built up over years to secure their survival. But from shareholders’ point of view, holding cash is an inefficient use of capital that should be allocated elsewhere to boost growth. And if there are no attractive opportunities for investment and M&A, which is often the case in Japan due to its declining population, investors prefer companies to return their money to shareholders.
Investors have been emboldened in particular by a name-and-shame campaign the Tokyo Stock Exchange launched to goad companies to publish a plan to boost capital efficiency. Among firms included in the Topix Prime index, 54% have so far published plans. While investors say the quality of reports vary, it is a good starting point.
Activist investors, in particular, see the TSE’s decree almost as an endorsement on their cause, leading to a surge in the number of campaigns.
Cross Shareholdings
Many Japanese companies hold stakes in other companies, often to maintain good relationships with their clients. In some cases, two companies invest in each other — so-called cross-shareholdings.
Investors often view the practice with suspicion, fearing the arrangement undermines corporate discipline by having friendly shareholders who just mutually rubber stamp management decisions.
While Japanese companies have been gradually reducing cross-shareholdings for many years, corporate shareholdings still account for 9% of Japanese stock ownership, according to Nomura Institute of Capital Markets Research.
Many investors are urging companies to sell down strategic holdings further and use the proceeds to boost growth.
Pressure at Shareholders’ Meetings
Shareholder demands are not limited to activists. Many Japanese institutional investors are becoming open to voting against management at annual general shareholders meetings. Opposition to proposals from companies are on the rise, especially CEO appointments.
Asset managers have said they will not support CEOs of companies that have low return on equity, hold a large amount of cross-shareholdings or lack gender diversity in board members.
Longtime chairman of Canon Inc. Fujio Mitarai, almost got voted out at the camera-maker’s AGM last year, scraping by with a wafer-thin majority of 50.59%, because the company had no woman on its board. His support jumped back to 90.86% this year after the firm installed a female former bureaucrat as an outside director.
Board Diversity
Such pressure has helped to address a shortage of women on Japanese boards. Women now hold 17% of board seats in Japan, still a long way from a government target of 30% by 2030, but up significantly from 2.3% a decade ago.
This article was generated from an automated news agency feed without modifications to text.
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