Every June season of Japanese corporate AGMs serves as a reminder of the delicate balance with which Tokyo’s markets operate: Shareholders are granted enormous destructive powers but have been reluctant to use them.
There are many predictions that this balance may eventually collapse, despite its long-standing hold. But the 2023 annual shareholder meeting already appears to be different, according to investor relations departments and investors at both companies.
At the most visible end, there are more shareholder activists than ever targeting Japanese companies, some of which, like Elliott, have significantly expanded their Japanese teams since 2022.
Mizuho Securities and others predict that Japanese companies will face a record number of shareholder proposals this quarter. Their approach, too, is shifting: Before they were outspoken calls for share buybacks and quick asset sales, many are now pushing for systemic shifts in capital allocation, climate policy and transparency.
But a more fundamental challenge is also gathering strength from the traditional end of asset management. This is subject to a growing list of rules-based mandates, holding companies accountable on board diversity and ESG grounds, and threatening to unleash at least some of the chronically underutilized shareholder power to chief executives who fail to address their governance deficiencies. executive officer.
Japan’s AGM season has always been in the spotlight, often for the wrong reasons. With such a high percentage of companies in the country (the current total of 2,283) ending their financial year at the end of March, June is the obvious time for shareholder meetings after the full year’s reporting and registration of proposals has been completed.
But this has gone to extremes. Back in the mid-1990s, 96% of companies held their AGMs on the same day in June. Today, given the growing need to appear shareholder-friendly, the season is a little more spread out: less than 80% of companies hold seven-day meetings at the end of the month.
Behind this clustering is a technical fear. Traditionally, Japanese companies do not have a staggered board of directors, and almost all companies require shareholders to elect directors, including the CEO as a representative director. In theory, given that any one of them could be ousted with less than 50% support, that means that every AGM comes with the notion that the corporate governor’s seat will disappear entirely.
For decades, this theoretical risk has been offset in ways that have given chief executives peace of mind. Friendly companies form a grid of “loyal” shareholders who, combined with a docile investor base, virtually guarantee that the nominee’s support will be in the very comfortable 85% to 95% zone.
But companies can now see that this is changing rapidly, as stewardship obligations force pension funds and life insurers to become less docile, and old habits (such as boards without a decent corps of independent members) now bring CEOs vulnerability.
Companies whose fiscal years end in December have already held annual meetings, and some of those companies’ struggles with investors now serve as a warning to thousands of other companies that will meet over the next four weeks. Canon chief executive Fujio Mitarai, a standout in corporate Japan, narrowly passed with just 50.59 percent of the vote. Major shareholders, including BlackRock, voted against it, and he was held accountable because Canon currently has no female directors.
Top executives at retailer Seven & i Holdings have survived, but only after a sustained attack by US activist fund ValueAct Capital and the company’s massive efforts to win over shareholders. These efforts included extensive presentations to investors in Europe and the United States, and set a precedent for others to follow.
Fund managers contacted by the FT said they had held a series of extraordinary meetings with investor relations departments and chief financial officers of Japanese companies that now feel threatened in the coming AGM season and are trying to Protect their CEO from less than 50% of the vote. Ideally, these fund managers added, the threat itself would trigger an improvement: Japan would still have a balance between better-governed companies on the one hand and less docile investors on the other.
leo.lewis@ft.com