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How Companies in Japan Can Prepare for Shareholder Activists

The increased scrutiny around Japanese company performance has been driven by a confluence of new government regulations and a growing global investor base that is being capitalized on by activists. The Kishida Administration’s recently unveiled “New Capitalism” policy focuses on turning Japanese companies into attractive investment opportunities for both overseas and Japanese investors.¹As part of this effort, Japan also overhauled its Nippon Individual Savings Account (“NISA”) to make all investments under this program tax exempt for the lifetime of the investor in an effort to ensure steady and reliable returns. Tokyo’s stock exchange has also begun releasing monthly lists of listed companies that have disclosed plans to optimize its capital management and share price that will help enhance investor returns.² As heard in our meetings with Japanese advisors and companies, they are ready and willing to try new approaches as the world around them is changing.

Japanese companies have gone from a small global investor base to now having on average 30% of investors hailing from the US, Europe, and the UK.³ With this shift in investor base comes new expectations of what a company’s board structure should look like, what the return on equity should be, and whether traditional conglomerates are the best way to drive shareholder value. Board independence and tenure are areas in which international investors have differing expectations. These global shareholders will seek more aggressive shareholder value maximization, with the perspective that boards should foremost serve their interests. Companies should ensure their IR strategies are engaging and responsive.

Amid a favorable regulatory market and increased attention from global shareholders, there is a perfect storm for activists to deploy sophisticated campaigns aimed at gleaning value from companies. Japanese media is seen as becoming more receptive toward activist campaigns and activism campaigns are becoming more sophisticated in using the media as a tool. Activists are increasingly using the media to target their messaging to garner support from financial media, investors, retail shareholders, and government officials. Companies should be preparing rapid response plans that will quickly engage with the media.

With this rise in activism, the role of proxy advisors, such as ISS and Glass Lewis, has only grown more important. While both advisors have less appeal to the Japanese shareholders, they are heavily relied on by US, UK, and European investors, particularly when they are only beginning to invest in a new market. With ISS reinstating its ROE policy for 2024, there is increased scrutiny on Japanese boards to drive investor returns. It is critical to engage with the proxy advisors in contested situations to show the Board is acting in the best interest of shareholders.

Boards must also consider more than just their own composition and financial considerations. As we heard in many conversations, ESG activism has been on the rise and should be expected to continue to grow in importance. The UNPRI, the Responsible Investment arm of the United Nations, which boasts more than 5,300 signatories with AUM of US$121 trillion, seems to have its sights set on Japan. Its signatories act in concert to push responsible investment agendas, including environmental and social concerns. The organization has devoted increased resources to Japan as of late, hosting its last annual conference in Tokyo as well as selecting Japan for its first in-depth economic transition to net zero transition report. These investors are not motivated by purely financial concerns – rather, they are focused on long-term risk mitigation. Friends of the Earth has already found its footing in Japan, running campaigns focused on fossil fuels, nuclear power, among other topics. When thinking about ESG policies, it is important to show the work with clear data and targets to earn the support of a global investor.

Corporate activism is likely only to become a bigger topic in 2024 as the country continues to see increased international investment. It is time for Japanese companies to move proactively so they are not pushed to do so by activists.

Footnotes:

1: Gearoid Reidy and Yuko Takeo, “A Quiet Ex-Banker Shocks Markets With ‘Socialist’ Tilt in Japan,” Bloomberg (June 1, 2022)

2: Clement Tan, “Japan wants higher returns for investors — here’s what it’s doing,” CNBC (January 12, 2024)

3: Kensho Motowaki, “Japan companies raise 30% more capital from overseas stock offerings,” Nikkei (April 24, 2024)