A Japanese research firm suggests that there may be a record 14 shareholder proposals (all with the intention of creating higher returns) that will be made in the next few weeks as annual general meeting season begin in Tokyo and elsewhere.
Why is this surprising? In the past it has been uncommon for shareholders in Japan’s institutions to oppose company resolutions. Activists were considered ‘bad guys.’ What has changed this dynamic is the creation of the Stewardship Code (the “Code”) under the tutelage of the economically driven Prime Minister Shinzo Abe. In force since May, it already has been followed by over one hundred institutions and has been a magnet for foreign investors. The Code is geared towards institutional investors and mandates that they “enhance the medium- to long-term investment return for their clients and beneficiaries by improving and fostering the investee companies’ corporate value and sustainable growth through constructive engagement, or purposeful dialogue, based on in-depth knowledge on the companies and their business environment.” As such, it obligates asset managers to engage with investee companies and their management teams on strategic and governance matters and to avoid shareholder complacency.
The Code borrows heavily from the UK version insofar as it encourages domestic investors to both collaborate and take issue with low dividend payouts and conflicts of interest among directors.
There is a growing sense that investors in Japan have to challenge what some have called the “deflationary” mindset that has cemented since the turn of this century. They see the Code as the harbinger of a new environment where corporate cash-holding is no longer a common practice and the returns on top Japanese companies can compete with those on the S&P 500.
To make a proposal for a Japanese company, an investor is required to hold as little as one percent of shares for six months. Already this year, we have seen a shareholder with a 4.7% stake in a large fridge/freezer manufacturer submit a proposal to drastically increase dividends or otherwise explain why it could not. Although this proposal did not pass, it is a sign of what is soon to come as Japanese investors resist traditional shareholder behaviour in order to attain economic growth, higher dividends and more transparent corporate governance.