The Viewpoint: A focus on shareholders – the transformation of Japanese equity culture

Not all that long ago many global investors didn’t give Japan much of a thought, myself included.

This was partly because of the uninspiring macroeconomic backdrop, but mostly because Japanese companies had a history of insularity and antipathy towards shareholders. For example, Japanese firms often used to hold their AGMs on the same day, with the intention that investors wouldn’t be able to attend more than one and ruffle too many feathers. Such wariness of shareholders really typified the prevailing attitude of Japanese corporate management.

That started to change with the publication of the Japan Stewardship Code in 2014[1], which was quickly followed by the Japan Corporate Governance Code[2] the year after. These didn’t elicit an immediate response from companies in Japan, but over the following few years we started to see some encouraging changes. These included a noticeable uptick in board independence, cross shareholdings between different companies started to unwind, huge cash piles began to be put to work, and generally the market started to embrace shareholders a little bit more.

There have been some excellent positive examples of this new focus in recent years. Hitachi, a business that was struggling in the late 2000s, has significantly restructured itself, sold off non-core businesses and focused on higher margin segments. It has been rewarded with substantial share price performance. Meanwhile, we have seen activist shareholders at companies like Astellas seeking structural changes to the business that would have been unheard of just 10 years ago. And a similar situation has played out at Seven & I in the last couple of years, showing that even one of the most ‘Japanese’ of companies is not immune to the changes.

A consequence of this change in mindset, which has been driven by a clearer focus on capital efficiency and discipline, is that Japanese equites now deserve their place at the top table. There are now some high quality Japanese companies out there and over the last few years they have started to get the recognition they deserve.

As responsible investors, we also consider the bigger picture when considering corporate behaviour. Here too Japan is showing definite signs of improvement. Japan’s banks provide a good example of a sector that was set in its ways and in which practices lagged a long way behind European and North American peers. However, renewed efforts from the government and regulators to bolster corporate governance practices have brought improvements such as the adoption of more independent board structures, with a higher proportion of outside directors. Revisions to the Corporate Governance Code in 2021 and wider initiatives led by the Tokyo Stock Exchange have further contributed to progress.

The country’s banks are also playing a major role in financing positive social impacts, as demonstrated through programmes like the Japan Impact-Driven Financing Initiative, which promotes investments addressing environmental and social issues. This actually goes wider than the banking sector and involves multiple financial institutions, including insurance companies, and venture capital firms, working together to support projects that align with the UN Sustainable Development Goals.

There has also been significant progress when it comes to climate reporting. Corporate disclosure and reporting practices in Japan are now among the highest in the world. Japan has one of the highest rates of adoption of the Task Force on Climate-related Financial Disclosures[3] (TCFD) with over 120 companies adopting the reporting framework into their disclosure practices. Encouragingly, the rate of early adopters for the Task Force on Natural Financial Disclosures (TNFD) is also high, accounting for about 25% of worldwide early adopters.

Tackling board-level gender diversity is also one of our priorities. This has specific challenges in Japan, as societal norms have been a long time changing. Without concerted efforts from management, progress is slow. There is evidence that diversity is now being discussed more frequently at board level, but companies are still wary of adopting targets and using formal policies to drive progress. There have however been notable improvements to flexible working practices to allow carers (who are overwhelmingly female) to reduce working hours and stay on the career ladder. There is still much to do, but things are moving in a positive direction, aided by regulatory changes. For example, the Act on Promotion of Women’s Participation and Advancement in the Workplace, was extended in 2022 to companies with more than 100 employees, from the previous 300[4].

While corporate governance standards in Japan still trail those of many developed market counterparts, the direction of travel has been set. Trying to completely change the mindset of corporate Japan was never going to be easy but I think the regulators and the Tokyo Stock Exchange deserve praise for starting that process off and running with it. We believe that all of these factors are helping to bring down barriers to investing and open up Japan as an increasingly attractive destination for allocating capital.

For professional investors only.  This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.

[1] Principles for Responsible Institutional Investors - Japan’s Stewardship Code: Financial Services Agency
[2]  Enhancing Corporate Governance - Japan Exchange Group
[3] What’s next for Japanese sustainability disclosure standards - EY Japan
[4] Act on Promotion of Women's Participation and Advancement in the Workplace - English - Japanese Law Translation