Record demands from activist investors driving focus on governance, efficiency
Activist investors are inundating Japanese companies with an unprecedented number of proposals that will keep executives on their toes at annual general meetings (AGMs).
Firms have received a record 137 requests from activists, according to data compiled by Mitsubishi UFJ Trust & Banking. The shareholders are delving deeper into management decisions and demanding changes to board structures and privatizations.
The country's jammed AGM season matters more than ever this year as investors seek signs that Japanese stocks — which have underperformed most major markets this year — can get out of a rut. The proposals are putting added pressure on management to deliver tangible growth strategies, rather than simply turning to the quick fix of more buybacks or dividends.
"With new activist holdings being revealed each day, companies are paying extra attention to governance and capital efficiency,' said Rieko Otsuka, a strategist at MCP Asset Management Japan. "There's a sense of impending crisis among management about when they might be targeted,' she said.
The season peaks next week, with more than 40% of listed companies — that's over 1,700 firms — set to hold AGMs. They will be at venues including the luxury Palace Hotel near the emperor's residence and the Ariake Arena, which was built as a venue for the Tokyo 2020 Olympics.
Some executives are readying for drawn-out meetings as overall proposals from activists and other shareholders have increased to almost 400, according to Mitsubishi UFJ Trust. That's well over double the number a decade ago.
In contrast, in the United States, total proposals this year fell 14% through May 13 compared with the January-June period last year, as investor demand declined for environmental and social issue-related changes, according to a report from ISS-Corporate based on Russell 3000 index companies.
Activist investors typically acquire a significant stake and then exert pressure on a firm to influence how it's run, suggesting that the increasing presence of these shareholders in Japan may be key to driving pro-growth strategies.
The scrutiny in Japan is important right now because it may help carve out a path for corporate growth amid a worsening business climate as tariffs upend key sectors of the economy. Gains in Japanese stocks have been limited this year, raising the risk that the Topix Index's two-year rally is over.
"We get to vote once a year, so it's important and I think — probably more than other cultures — voting against the president or the chairman sends a pretty clear message,' said Carl Vine, co-head of Asia-Pacific equities at M&G Investments, whose holdings include Toyota and Seven & I Holdings.
Even so, proposals aimed at improving shareholder returns still make up a large chunk of activists' requests, and that may provide a short-term boost to the market as deep-pocketed companies pour more cash into buybacks.
In addition, activist proposals rarely get passed because of opposition from domestic investors, who tend to be quite conservative.
Still, the increase in proposals comes at an unfortunate time for executives who can no longer rely as much as on cross-shareholders. The waning influence of this cohort, also known as stable or policy shareholders, may increase the clout of institutional investors at proxy fights.
This puts the focus more on companies with low approval ratings and "opens up the possibility that maybe a new shareholder would come in and try and put additional pressure on management,' said Bruce Kirk, chief Japan equity strategist at Goldman Sachs Japan.
All this means that AGMs are now a far cry from how they were conducted before Japan's corporate reforms kicked in and the market caught the attention of overseas investors.
"There was a time when decisions were made at AGMs in a planned, harmonious, and ritualistic manner, just for the sake of it,' said Hidenori Yoshikawa, chief consultant at Daiwa Institute of Research, a Tokyo-based think tank. "Now, until the meeting ends, we don't know how it will turn out.'
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