Japan as an Activist’s Paradise?

Traditionally, shareholder activists have been viewed as very hostile by Japanese companies and Japanese society in general, and British academics who studied trends in shareholder activism in Japan in the early 2010s predicted that shareholder activism had not and would not change corporate governance in Japan. Indeed, until the early 2010s, when they conducted their research, shareholder activism in Japan had not had a significant impact on corporate activity. However, since 2019, Japan has already become one of the world's leading 'activist bases', second only to the US, in terms of the number of companies publicly subject to shareholder activism.

This post is based on a paper of mine on shareholder activism in Japan, on trends in shareholder activism in 2024, and on feedback on my paper from various experts. Behind the major changes in the shareholder activism in Japan are structural changes in the capital markets, including the shareholding structure of Japanese listed companies, and changes in corporate governance in light of these changes. Since the late 1990s, the shareholding structure of Japanese listed companies has shifted significantly towards foreign and institutional investors, and cross-shareholdings have also been rapidly unwound. In light of these structural changes in the capital markets, investor behaviour in the Japanese market began to change significantly around the time of the enactment of the Stewardship Code in 2014 and the Corporate Governance Code in 2015 (both first editions). In addition, the individual disclosure rules on institutional voting behaviour set out in the revised Stewardship Code of 2017 have triggered changes in institutional investor behaviour, creating a situation that is conducive to activism activities.

As activists focus their activities on engagement behind the scenes, it is very difficult to track their activities accurately. However, given the recent surge in share buybacks by Japanese companies (especially in low PBR [Price Book-value Ratio] companies, which are the main targets of activists) and the return on investment of activists estimated from disclosure documents such as large shareholding reports and share price trends, we can infer that activists as a whole have achieved a considerable degree of ‘success’ and ‘return on investment’ since the late 2010s, when the number of activist activities in Japan increased dramatically. The market reforms initiated by the Tokyo Stock Exchange (TSE) in 2023 (the ‘PBR reforms’) have also provided a strong tailwind for activists in terms of demands for efficient financial and management policies. In addition, activist shareholder proposals have increased dramatically in recent years, and in more than a few cases, many institutional investors have supported them, suggesting that shareholder activism has entered a phase of further activism. There is no doubt that Japan is now an important global 'activist base'.

So, has Japan become a paradise for activists? Although activists are becoming more accepted in Japanese society, there have been almost no cases of Japanese investors investing in activists. And while institutional investors are gradually becoming more friendly to activist activities, traditional Japanese institutional investors, such as large life insurance companies, are still unlikely to vote against management. One securities analyst familiar with activist trends predicts, “it will take about five years for activism to fully take root in Japan”.

The mindset of Japanese corporate management is in a state of transition. Some are resisting the rapid structural changes in capital markets and corporate governance and are trying to insulate management from market pressures by returning to traditional multi-stakeholder management. However, in today's highly developed capital markets, it is essential to face the market and gain investor confidence also in order to realise the interests of the various stakeholders. In particular, companies with a PBR of less than 1x, where the liquidation value exceeds the market value, will have the most urgent task of regaining market confidence through thorough financial and management reforms as demanded by activists.

In order to pursue efficient corporate management without losing management independence, companies should pursue and implement financial and management strategies that are ‘ahead of activism’, rather than simply rejecting or passively accepting activists' demands. In other words, the company should always pursue the most appropriate capital policy on its own initiative, while at the same time constantly disclosing and engaging with investors to gain their confidence. In recent years, some Japanese companies have attempted to balance social activities and corporate value enhancement by convincing investors that they can increase corporate value in the long term as an extension of such thorough financial and management reforms (for instance, these activities have been taken up in the report of the G7 UK Governmental Taskforce on social impact activities).

Japanese companies have traditionally been characterised by multi-stakeholder management, while shareholder-oriented financial and management strategies have lagged behind. The Japanese stock market has reached a new record high in 2024, and the TSE PBR reforms are seen as a key driver. There will be no denying the impact of activist activity, which overlaps with such market reforms in terms of the demand for efficient capital allocation policy. The key to a true revival of Japanese companies lies in their ability to take the initiative and embrace financial and management strategies that go beyond activism to balance corporate social activities and enhancing corporate value through engagement with investors.

The author’s complete article can be found here.

Hiroyuki Watanabe is a Visiting Scholar at the University of London (IALS) and University of Luxembourg (LCEL) and a Professor of Law in Japan.