Japan's second-biggest dairy, a global property empire and an Osaka-based paint company may not seem to have much in common. But over the past six months — with corporate Japan facing potentially the most contentious shareholder meeting season in history — they have become allies in quiet panic.
Acutely aware of the high-profile activist pressures swirling around Sony, Toshiba and Olympus and keen to avoid the same spotlight, Morinaga Milk, Mitsubishi Estate and Kansai Paint are among a record 46 Japanese corporations that have attempted to forestall trouble at their annual meetings by pledging to scrap their takeover defence strategies — more than twice the number that did so in 2018.
This and other phenomena show Japan's market norms are changing, say bullish investors and analysts. AGMs are scarier than in the past. Companies are making placatory gestures ahead of this year's round of meetings with the same superfluous cash piles and inexplicable equity portfolios they always had, but now stripped of two great comforts: the support of docile domestic institutions and the certainty that any loud-mouthed activists they face can be easily cast as greedy barbarians.
Companies may be right to feel exposed, according to Jefferies strategist Zuhair Khan. He says that recent conversations with hedge funds and long-term investors have revealed a swelling cohort of shareholders with concrete plans to vote against the management teams of underperforming businesses.
"As with previous years, I of course worry that my hopes will be dashed by the end results but I think now we are seeing a broad movement," he said.
One of the main differences now, he added, was the increasingly stringent demands made by Japan's US$1.5 trillion ($2.2t) Government Pension Investment Fund on the active and passive managers it mandates to explain their decisions.
"It is a lot of pressure, and I believe that it has pushed fund managers further in terms of toughness and a willingness to go against management."
Other analysts describe the abandonment of poison pills and record share buybacks ahead of this year's AGMs as a "clear" signal of corporate nervousness around the changing stance of shareholders, and evidence of a tectonic shift.
The increasing willingness of individual and institutional Japanese investors to vote against particular board directors or company proposals is also expected to give a more influential role to proxy advisers such as ISS and Glass Lewis.
The season, which reaches its peak next week, is sure of action. In terms of spectacle, the main events will be Nissan, where investors have their first chance to vent frustrations at the chaos left by the arrest of former chief Carlos Ghosn; railway JR Kyushu, which faces far-reaching demands from the US activist Fir Tree; and Lixil, the home-fittings group whose meeting will give shareholders an unprecedented choice between two competing slates for proposed management teams.
Behind these fireworks, though, is a fundamental increase in shareholder ambition.
Analysts at Goldman Sachs calculate that the number of companies to have received shareholder proposals ahead of their AGMs has surged to a record 59 this year from 42 in 2018 — with a high number of them related to the dismissal of directors or auditors.
The level of announced share buybacks this year is close to ¥7t ($98.9 billion) and already 7 per cent higher than for the whole of 2018. Analysts say this is significant because what unites most of the companies announcing buybacks is the presence of activists on their shareholder registers.
And there are now a lot of them: Japan, said CLSA analyst Nicholas Smith, has more activist funds and private equity companies on the ground than anywhere outside the US.
Even when there are no visible activists, companies appear less ready to simply hope for the best at their AGMs. Shares in Nomura surged 10 per cent on Wednesday after the company announced a US$1.4b share buyback.
A few days earlier, in a move that may have influenced that decision, ISS published a note recommending investors vote against the reappointment of Koji Nagai, Nomura's chairman and chief executive, over the company's failure to improve governance.
But the activists — which prefer to be described as "engagement" funds — have also changed tack. Many have judged that they can probably achieve more by quietly discussing their complaints with management than with an eye-catching assault.
Public clashes are massively outnumbered by behind-the-scenes engagement. The managers of three funds recently involved in activist campaigns say there are now acceptable channels through which they can put pressure on Japanese companies.
"If you have to make a proposal at an AGM, that either means your attempt at engagement has failed or you didn't have a full understanding of the situation in the first place," said Smith at CLSA, adding that the last thing the market needs is an ugly public battle that could lead to companies closing ranks. "It's Japan. If you get angry you won't get what you want and a proposal can look like a tantrum."
Seth Fischer, the head of Hong Kong-based hedge fund Oasis Capital, has withdrawn eight of the nine proposals he had tabled at different companies ahead of the AGM season because the companies have already jumped in to address the issues with him directly.
"Nobody likes a public showdown in Japan. This has always been the case," he said. "Now with more companies willing to meaningfully engage with shareholders, this has led to investors making real progress behind the scenes."
But despite this optimism, said analysts, there remained two significant sources of concern. The first was that while the overall effect of behind-the-scenes engagement may suit companies and certain types of investors, there was always a danger that management would take that as an excuse for a more general reduction in transparency and ultimately dilute the importance of the AGMs.
A bigger concern, said Goldman Sachs analyst Christopher Vilburn, was that despite the greater level of engagement, few companies appeared to be taking voting patterns at the AGMs as a prompt to make serious changes in corporate behaviour.
"While there have been successes for shareholder engagement . . . the general picture remains largely unchanged," said Vilburn.
Written by: Leo Lewis
© Financial Times