Management booted out as Japan's shareholders flex their muscles in AGMs

Business Times

02-07-2025

[TOKYO] Japan's annual general meetings in June saw a CEO voted out and an entire board of directors replaced in a sign shareholders are increasingly holding management to account and providing impetus to regulatory moves to boost corporate value and share prices.
Authorities in Japan, which is emerging from years of deflation, have ramped up calls for more proactive and vocal shareholder stewardship over the last two years - and the AGMs suggest that activists and domestic institutional investors are making the same arguments to improve corporate performance.
An increasingly assertive domestic shareholder base is likely to sway management changes, investors and advisors say, providing momentum to Tokyo Stock Exchange's quest to make the world's fourth-largest economy an attractive destination for international and domestic investment.
Investors are already flocking in, with the TSE's reforms helping spark a rally in Japanese stocks, which last year scaled an all-time record high and have since been buoyant.
Last month chemicals firm Taiyo Holdings' chief executive officer Eiji Sato and the entire board of directors of electrical parts maker Tokyo Cosmos Electric were forced to step down.
'It's extremely rare in Japan that a boss or a board member loses his job merely because he's deeply disappointing,' said Nicholas Smith, strategist at CLSA Securities.
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Whereas in the past management has typically only been forced out in cases of misconduct or fraud, the prospect of ouster for perceived poor business decisions is prompting executives and the boards of companies to change course to meet shareholder demands.
'There's no aftermarket for dud managers. There's negligible mid-career hiring and these people are lifers at their companies so all of this is quietly terrifying,' Smith said.
Taiyo CEO Sato was punished for diversifying into pharmaceuticals, which had poorer margins than its core business, dismissing privatisation proposals from private equity funds and because he was deemed to be overpaid, Smith said.
'This is one of the rare cases of a CEO being ousted for corporate governance reasons rather than legal ones,' said Seth Fischer, chief investment officer at activist investor Oasis Management, which voted against Sato.
Taiyo's largest shareholder DIC Corp and founding family also voted against Sato, Tokyo Shoko Research showed.
'Now management can be voted out for not making any changes and other companies are moving towards needing to do something,' Fischer added.
Aligning with activists
Managers have cause for concern as domestic investors adopt more stringent shareholder voting guidelines in line with the TSE's reform recommendations, which has made voting against directors more commonplace.
For instance, Sumitomo Mitsui Trust Asset Management's votes against management proposals in the 12 months ended June 2024 stood at 22.1 per cent, up from 19.8 per cent the year prior.
Increasingly this means domestic asset managers vote in the same way as activists.
'There's more alignment between activists and domestic shareholders on capital policy which is leaving companies with nowhere to hide,' said Govinda Finn, a governance researcher at Kobe University.
'We have an incredibly good relationship with domestic investors and increasingly engage with them to share ideas about what we think the issues at companies are,' Fischer said.
The new prospect of domestic investors voting against management has prompted firms to take preventative action, said Hiroo Shimoda, senior manager at MUFJ Trust and Banking, which advises firms on shareholder relations.
'More and more companies think it would be a real problem if their domestic shareholders and activists came to be in agreement, so they rework their strategies in advance,' Shimoda said. REUTERS