Corporate governance reform has been a key area of development in the Japanese equity market under the leadership of Prime Minister Shinzo Abe, says Nikko Asset Management (AM).
Since the introduction of the Stewardship Code (2014), Corporate Governance Code (2015) and the subsequent revisions in 2017 and 2018, reform has had an impact on Japanese companies.
Evidence of this, sourced from the Tokyo Stock Exchange, Nikkei and Nomura Institute of Capital Markets Research, includes:
-Distribution to shareholders being set to double over the past five years to exceed JPY 15 trillion (approximately USD 13.6 billion) and break a record high in fiscal year end (FYE) March 2019, a 25 percent increase year-on-year.
-Seven consecutive years of decline in cross-shareholdings, at 9.5 percent (-0.6 percent year-on-year) in FYE March 2018.
-Increase in the number of companies with nomination/compensation committees (43.1 percent and 45.6 percent respectively, in December 2018, up from 10.5 percent and 13.4 percent in July 2015.
That said, recent discussions with global investors across regions leads Nikko AM to believe that a large number are still sitting waiting to see if the governance reform will gain momentum.
Looking at the assets tied with shareholder activists more globally, there is a growing amount of assets managed by activists over the years, the firm said.
While activist investments in the US (461 targets out of 805 globally in 2017) are significantly higher than other regions, these investors will have to look elsewhere to generate returns given the current heightened valuation in the US.
While “outbound” activists’ assets are increasingly being used in Japan, there is also an increasing number of home-grown activists. According to Nikkei, the total amount of activists’ investments in Japanese companies was at a record high at JPY 1.6 trillion March 2018, up 20 percent year-on-year. Nikko AM expects this “to continue to grow due to a better investment outlook.”
Some have always claimed that “hostile” activism can’t be as successful in Japan as it is in the US because of the historical and cultural context, which may have been the case before the corporate governance reform. However, given the rapidly changing environment, we have started to see successful activists’ campaigns recently, Nikko AM argued.
Additionally, the firm said it is seeing more Japanese companies doing what is “right” for their shareholders, even if it means going out of their “comfort zone.”
Doing what is “right” for shareholders may mean having to go hostile. The emergence of hostile suitors does not just mean companies are under attack. It also means that companies will be more prone to listen to different opinions from various investors.
Nikko AM argued that “constructive shareholder engagement would work better with hostile investors actively targeting companies in the market.”
Headquartered in Asia, Nikko AM has US$ 202 billion assets under management, as at 31 December 2018 and represents nearly 200 investment professionals and over 30 nationalities across 9 countries.
