by Jeff Allan
The annual shareholder meeting season is just wrapping up for many listed companies in Japan. The season is typically known as either overly uneventful or full of drama, depending on which company or group of shareholders you ask. In the past, the involvement of activist investors has often set the stage for a more entertaining meeting. Take Koito’s 1990 shareholder meeting with T Boone Pickens in attendance, as an example of how explosive these meetings can become. Most companies, however, never reach that level of drama or animosity.
This year though, many companies anticipated and encountered a different atmosphere than the shareholder meetings of years past. Corporate Japan has undergone many significant changes since the start of Abenomics, and this year marked the implementation of several initiatives aimed at overhauling the fundamental nature of shareholder culture in Japan. Various companies included on the newly created JPX-Nikkei 400 were able to tout their various accomplishments, while others that did not make that list faced greater accountability from more empowered and emboldened shareholders.
A Year of Significant Change
A major goal of Abenomics and its third arrow initiatives has been to create a more transparent and shareholder-oriented culture among Japanese companies. That has been no small feat and similar efforts in the past faced fierce resistance from several fronts. To their credit, the Abe administration has been able to gain needed support and implement many difficult changes that have improved Japan’s corporate culture.
Last year, the Financial Services Agency (FSA) implemented a stewardship code that encouraged institutional investors to play a more active role providing guidance and advice to the companies in which they invest. This summer also saw the introduction of the Tokyo Stock Exchange’s (TSE) corporate governance code, which established several guidelines that include external director requirements, accountability, and shareholder rights. In addition to these codes, other initiatives such as the JPX-Nikkei 400 have rewarded companies that prioritize shareholder values and profitability, providing even greater impetus for improvements across corporate Japan.
The result has been a greatly altered corporate landscape in which this year’s shareholder meetings took place. Japanese corporate management was eager to show their progress, while shareholders were poised to demand greater accountability.
At the Top of the Shareholder Agenda
A survey conducted by market research firm QUICK at the start of June showed that shareholders had very specific topics on the agenda as they headed into this shareholder meeting season. Chief among those was shareholder returns with 34 percent of respondents stating that as their topic of greatest interest. Meanwhile, return on equity (ROE) was the major concern for 32 percent of those polled. As noted by the Nikkei Asian Review, that means about two-thirds of respondents were most interested in understanding exactly how shareholder-oriented Japanese companies have actually become.
There is a strong likelihood that many shareholders were pleased with what they found. As we wrote about earlier this year, both shareholder dividends and share buybacks have hit record highs in Japan. Shareholders will receive a record US $110 billion this year from Japanese companies, as a result of a heavy focus on buybacks, boosting dividends, and improving ROE.
Companies in the Spotlight
Although the overall trend has been toward improvement, a few companies came under greater shareholder scrutiny due to a variety of extenuating circumstances. Rather than signify failure of these companies to maintain pace with changes in corporate Japan, however, the fact that these shareholder meetings have gained so much press is more emblematic of an increasingly vocal shareholder culture that is taking hold here.
Sharp’s meeting was notable for angry shareholders demanding the resignation of CEO Kozo Takahashi. The electronics company lost nearly US $1.8 billion for the last fiscal year, and has had to implement drastic bailout and restructuring efforts. Ultimately, Takahashi was re-elected to the post, as institutional investors were hesitant to oust him while the company is still in such dire financial straits.
Toshiba’s meeting also made the news due to its continuing accounting irregularities. Toshiba CEO Hisao Tanaka apologized to shareholders for the accounting irregularities that will likely force the company to cut operating profits by nearly US $55 billion for five years through 2014. The company has not yet been able to finalize earnings for 2014 and has had to forego a dividend. Toshiba plans to have a special shareholder meeting in September once a third-party investigation of its accounting practices is finished.
Toyota’s meeting drew attention, but for a more novel reason. The company is planning to issue what it has dubbed “Model AA” shares to investors. The shares are named after Toyota’s first production automobile, which it released in 1936. The novelty is that the company will base these new shares on convertible bond-type preferred stock. Investors must hold the shares for five years, after which they can be redeemed or converted to common shares. These new shares will also not be publicly traded. The move gained enthusiastic approval by 75 percent of the company’s shareholders. The opposing 25 percent were vocally critical of the plan, with some questioning its legality.
A Sign of Things to Come
This year’s shareholder meeting season was clearly different from years prior. As changes to corporate culture continue to ripple through Japanese companies, the annual shareholder meeting will increasingly evolve to reflect this improved investor climate. Many of the most significant changes, such as the new corporate code, will become more visible during the coming year. Investors can expect to see even greater improvements to shareholder orientation by the time next summer’s annual meeting season rolls around.