In Japan, Shareholders Finding Their Voice

Katsumi Shimizu has been somewhat sleep-deprived in the last few months—because of Japan’s annual shareholder meetings. He is on a mission to make them actually count for something.

Shimizu

Shimizu is chief of corporate governance operations at Japan’s Pension Fund Association, which manages 11 trillion yen ($95.5 billion) and represents Japan’s corporate pension funds. This proxy season—which reached its zenith in Japan four weeks ago, when half of all companies listed on the Tokyo Stock Exchange held meetings on the same day —the PFA has been on a crusade to advocate for shareholders. Says Shimizu, frankly: “We don’t vote for measures that lack clear explanation on how the changes would benefit the shareholders.”

Japan’s corporate governance landscape has seen a sweeping transformation in the last few years. After a long tradition of corporate executives and board directors doing as they please behind closed doors, foreign and domestic investors have begun using their voting power to force those doors open.

One powerful new tool investors have is the new corporation law that went into effect in Japan in May. Introduced to keep pace with the reorganizations underway at many corporations in Japan, the law allows corporate executives to make decisions more freely than before—but only within the confines of whatever articles of incorporation are approved by shareholders. The law also requires that companies create internal control systems, which would help outside investors in monitoring corporate management.

That strengthened investor clout has put the PFA in a powerful position, one Shimizu is all too happy to leverage. This year his team reviewed 819 proxy statements, slightly less than last year, and rejected numerous proposals. Of 82 corporations that proposed shelf registration as a takeover defense, the PFA rejected seven, saying the plans would allow directors to exercise the tactic arbitrarily without shareholder approval. The PFA also turned down measures that required super-majorities of dissenting votes for a resolution to be rejected.

“The PFA is a very influential organization. Institutional and corporate investors view them as their leader and watch the way they vote on measures.”

— Professor Megumi Suto

“The PFA is a very influential organization,” says Megumi Suto, a finance professor at Waseda University. “Institutional and corporate investors view them as their leader and watch the way they vote on measures.”

Stepping Up

The PFA began exercising its voting rights four years ago, spurred on by the depression that cloaked Japan’s economy throughout the 1990s. Shimizu and his colleagues first pondered their voting power in 2001, and realized they had no guiding principles for how to vote—so they wrote their own. Since then, other Japanese investors have replicated guidelines based on what the PFA has created.

Last year, proposals to increase shares of three companies—Fanuc Ltd., Tokyo Electron Ltd. and Yokogawa Electric Corp.—were turned down at shareholder meetings. It was an unprecedented episode of shareholder activism that left Corporate Japan astonished. Until then, investors never had enough clout to defeat a proposal.

Motomi Hashimoto, an executive director for the investment banking consulting department at Nomura Securities, traces the revolution back to Japan’s weak banking sector in the 1990s. Saddled with bad loans, she says, banks had to raise cash by selling shares of companies in which they previously had long-term relationships. That led to more short-term shareholders scooping up stocks.

The erosion of cross-shareholding relationships in Japan has created an opportunity for foreign and domestic investors—who have in the past been outnumbered by a company’s friendly investors—to get their opinions heard.

Fresh on the heels of last year’s victory, shareholders at Nintendo defeated a proposal to change the electronic gaming giant’s charter this year. Some companies reportedly abandoned measures in anticipation of shareholders rebellion. For example, Uniden Corp. and Tsugami Corp. decided to drop their takeover defense measures after receiving criticism from their shareholders.

Other companies such as Nippon Steel Corp. and Teijin Ltd. decided to lobby behind the scenes to avoid a confrontational showdown. These companies met with institutional investors beforehand and took steps to win their support on measures such as takeover defenses.

Sony Corp.’s shareholders voted on a resolution to have the company disclose executive compensation for individual officers. (Japanese companies currently disclose the total amount they pay to their directors but do not itemize individual compensation). Sony shareholders fell short of a majority needed to pass the resolution, but came much closer to victory compared to last year.

Almost all Japanese companies introduced a proposal to revise their corporate charter in response to Japan’s new corporation law, which requires kabushiki kaisha companies—the most common form of corporation in Japan—to create and disclose certain minimum governance standards.

Almost all Japanese companies introduced a proposal to revise their corporate charter in response to Japan’s new corporation law, which requires certain companies to create and disclose certain minimum governance standards.

The Busy Season

Many Japanese companies have a fiscal year ending in March and have their annual shareholder meetings around June. The peak date this year was June 29, when 1,528 companies held their meetings on the same day. Companies in Japan intentionally schedule their shareholder meetings on a single day to discourage the attendance of so-called sokaiya, racketeers often linked to organized crime.

Shimizu and his team do not attend the actual shareholder events. Instead, they carefully sift through the 20- to 30-page proxy statement from each company. They had to go through 150 to 200 statements on one of their busiest days this year.

To plow through the pile of paper under deadline, the PFA uses a special software developed to aid in quickly analyzing all the material. Once a proxy statement arrives, Shimizu and his colleagues sort through the paperwork, pinpoint relevant data, enter the information and let the computer do the analyzing. On average, they have no more than three days to review each statement. Even with the help of technology, it’s a demanding schedule and the timeline puts limitations on how much Shimizu and his colleagues can actually do.

To make Shimizu’s busy schedule even more congested this year, about 100 Japanese companies paid a visit to the PFA’s offices near Tokyo Tower. They came to glean advice on how best to craft its proxy statements so proposals weren’t rejected.

Crunch time is over for the time being, but Shimizu promises to stay vigilant; for all the new power given to shareholders, the new corporation law also grants executives enhanced corporate autonomy within the confines of the articles of incorporation shareholders approve. “We need to monitor companies even more carefully now, so there aren’t any abuses,” Shimizu says.

Japan’s corporate governance will continue its evolution and there’s no turning back, Suto at Waseda University says. “Changes may not be as quick as it may happen in the United States, but Japan is evolving at a pace fit to its own needs.”