Japan's value push will turn into a shove
15/05/2024 23:00
(The authors are Reuters Breakingviews columnists. The opinions
expressed are their own.)
By Una Galani and Anshuman Daga
MUMBAI/SINGAPORE, May 16 (Reuters Breakingviews) -
S hareholder meetings in Japan are usually dull affairs. But when
companies hold their annual gatherings next month investors
around the world will be paying closer attention than usual. The
outcomes will be a key indicator of progress for a
government-led campaign to boost corporate performance.
Japan's buoyant stock market suggests the push to improve
shareholder value is working. The benchmark Nikkei 225 Index
.N225 in February smashed through levels last seen before the
country’s asset bubble burst more than 30 years ago. That, in
turn, supports the mission to reflate the $4.2 trillion economy.
No wonder officials are anxious for signs the momentum can be
sustained.
may need to apply more pressure, however. The 69-year-old
boss of Japan Exchange 8697.T has taken charge of an effort
that former Prime Minister Shinzo Abe kicked off in 2012 when he
called for structural reforms. The goal: to improve national
productivity after a long period of slow growth and deflation.
Japan launched a stewardship code in 2014, encouraging
companies to engage with their investors. Last year it followed
up with guidelines for fair mergers and acquisitions, warning
companies to weigh up takeover proposals with shareholders in
mind. The upshot is more independent directors on corporate
boards and less ownership of stocks by banks, a feature that
hampers change.
Under Yamaji's leadership, the Tokyo Stock Exchange in 2022
divided the market into three segments, partly based on the
level of constructive dialogue companies have with global
investors. In January, the exchange started shaming individual
companies that are not disclosing their plans to enhance
shareholder value by excluding them from a list it publishes
each month.
The idea is to force companies into rigorous boardroom
debates that can lead to better disclosure, and then to improved
performance. To get there, Japanese companies need to focus on
high-return businesses, offload underperforming ones, and shrink
the piles of cash and passive shareholdings on their balance
sheets.
Yamaji's push has scored some early success. Some 54% of the
1,650 companies on the Tokyo Stock Exchange’s prime board had
signed up to his enhanced disclosure mission as of end-March, up
from the 40% that appeared on the first list in January.
There is a long way to go, however. Notable holdouts include
$290 billion automaker Toyota Motor 7203.T , Japan's largest
company by market value, tech investor SoftBank 9984.T , and
Uniqlo owner Fast Retailing 9983.T . On the standard board,
home to smaller companies, just 16% have ticked the exchange’s
disclosure box.
More efficient use of assets and human capital is an urgent
national priority. The official push to restructure the market
started shortly after Japan's population peaked in 2008. The
country has welcomed more women and older people into the
workforce, but still struggles with a dearth of employees. The
number of firms bankrupted due to labour shortages in the second
half of 2023 was around eight times the level a decade ago, data
compiled by Morgan Stanley MUFG Securities show. Some economists
think the Bank of Japan 8301.T , which ended a 17-year period
of negative interest rates in March, could soon find itself
fighting a wage-led inflation spiral.
Despite some encouraging signs, Japanese companies in the
MSCI Japan index have a long way to go. Their return on equity
is just below 10%, well below the 14% and 18% earned by members
of equivalent benchmarks in Europe and the United States.
FLYING IN FORMATION
Changing corporate attitudes is a gargantuan task. The
exchange has held seminars, bringing in accounting experts to
explain the cost of capital to executives. Activist investors
like Elliott Management are helping too. Real estate developer
Mitsui Fudosan 8801.T and trading giant Sumitomo 8053.T
recently pledged to boost payout ratios under pressure from the
U.S. fund run by Paul Singer. Convenience store owner Seven & i
3382.T is restructuring after a campaign by ValueAct, another
American firm.
Public relations advisers are fielding requests by Japanese
firms for advice on how to communicate with investors before
activists coming knocking. Kenji Kobayashi, in the newly created
role of chief stakeholder engagement officer at Mitsubishi
8058.T , said in November the company had met with some 100
foreign investors in the past six months, double the number it
had encountered in the previous year.
Upcoming annual meetings in June will offer a verdict on
these efforts. Japanese officials will be counting the number of
shareholder proposals submitted by activists, how many won
enough votes to pass, and the approval ratings of CEOs. Because
companies typically lay out their medium-term business plans
around the same time, the number complying with enhanced
disclosure requirements also ought to rise.
Yet some still appear to reject the bourse's approach. It
asked companies to use certain phrases, such as "action to
implement management that is conscious of cost of capital", to
enable automated collection of results. But Toyota uses the term
"growing together with stakeholders". The carmaker is under less
pressure to conform as its shares trade above book value.
Nonetheless, such high-profile holdouts signal broader
resistance in corporate Japan.
Equity analysts are tracking other measures of progress.
Some 46% of companies in the Topix .TOPX now trade at or below
book value. That is down from 56% at the start of 2023, per
Goldman Sachs, but still higher than other developed
markets. Meanwhile, Japanese companies are increasing their
borrowings: Average interest-bearing debt for Topix constituents
hit 205 billion yen ($1.3 billion) as of May, up 10% from the
start of 2023, according to Societe Generale.
The exchange has more levers to pull. It could offer lower
listing fees to companies that conform. On top of sharing case
studies of those that have good disclosures, it could highlight
those that do not.
Some activists want Japan to go further by barring
individuals close to lending banks from acting as independent
directors or forcing listed subsidiaries to have a majority of
unaligned board members. Yet there is a limit to what the
exchange, which lacks regulatory powers, can achieve.
A bourse operator should not have to play the role of
activist with listed companies. But with so much at stake in
Japan, it is easy to see why the government and the exchange
might soon conclude that the country’s value push needs another
shove.
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Graphic: More companies are disclosing shareholder value plans
https://reut.rs/44MFRU3
Graphic: Japan's return on equity is weak https://reut.rs/3wJaAVp
Graphic: Japanese companies are taking on more debt https://reut.rs/4bg1r5V
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(Editing by Peter Thal Larsen and Aditya Sriwatsav)
((For previous columns by the authors, Reuters customers can
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una.galani@thomsonreuters.com; Reuters Messaging:
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