MUMBAI/SINGAPORE, May 16 (Reuters Breakingviews): Shareholder 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 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.
Hiromi Yamaji may need to apply more pressure, however. The 69-year-old boss of Japan Exchange 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 per cent 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 per cent that appeared on the first list in January.
There is a long way to go, however. Notable holdouts include $290 billion automaker Toyota Motor, Japan's largest company by market value, tech investor SoftBank, and Uniqlo owner Fast Retailing. On the standard board, home to smaller companies, just 16 per cent 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, 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 per cent, well below the 14 per cent and 18 per cent earned by members of equivalent benchmarks in Europe and the United States.
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 and trading giant Sumitomo recently pledged to boost payout ratios under pressure from the US fund run by Paul Singer. Convenience store owner Seven & i 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, 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 per cent of companies in the Topix now trade at or below book value. That is down from 56 per cent 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 per cent 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.
© 2024 - All Rights with The Financial Express
