Shareholder activism in Japan... or lack there of

One of the reasons Japanese stocks are dangerous is because companies are not shareholder-friendly. I consider myself as an OPMI (outside passive minority investor) so I don't expect to influence any company. Nevertheless, I expect the larger shareholders to push for changes if things get really dire. In Japan, that just doesn't happen. Because of this, you should apply a discount to Japanese stocks.

(Note: Poor corporate governance does not apply to some large, internationally-focused, companies such as Toyota or Sony. These companies are operated more like American companies, with more independent board of directors and/or outside management, better capital allocation decisions, and so on.)

Bloomberg has an in-depth story summarizing the current state of affairs in Japan. It profiles hedge fund TCI—you may recognize it in numerous stories in The Economist—and its difficulty carrying out changes. Who knows if TCI are the "good guys" or were simply out to make a quick buck that is detrimental in the long run. Regardless of what one thinks, the point about Japanese companies stands. If you have an interest in Japan, the story is worth reading to get a feel for the investment environment over there.

I hope Bloomberg doesn't mind me quoting a big chunk. I don't really have much to add*... I have beaten this issue to death...

“Sadly, Japan has been a value trap for many years,” says James Rosenwald, co-founder of Los Angeles-based Dalton Investments LLC, which controls more than $1 billion in assets, with 40 percent of its holdings invested in Japan. “That means the shares are amazingly cheap for an extended period of time without managements unlocking obvious value, such as companies with huge cash balances and no debt that have no intention of raising dividends or conducting share buybacks.”

Japanese managers are accustomed to investors who are both local and passive. These so-called stable shareholders -- financial institutions such as banks and insurance companies that buy stakes for the long term -- account for about 30 percent of all holdings in Japan’s $3.4 trillion equities market, according to the Tokyo Stock Exchange.

Threatened Japanese companies have deployed “poison pill” defense rules that can dilute the value of shares held by activist investors -- moves that have been backed by local courts.

Tradition has also helped thwart agitators. Annual general meetings, often the stage for shareholder showdowns in the U.S., are treated as a formality in Japan. This year, half of all Japanese AGMs were held on the last Friday in June. As recently as 1995, 96 percent of Japanese companies held their AGMs on the same day.


Western investors who try to impose their own will in Japan can run into boards made up mostly of company executives. Those with outside directors often hire them from companies that already have commercial relationships with the business.

Japan’s publicly traded companies aren’t required by law to hire independent board members, and managerial oversight is left to auditors appointed by the businesses themselves, according to Hiroaki Niihara, an official at the Ministry of Economy, Trade and Industry who has tracked governance issues.

In June, METI recommended that public companies have at least one independent director or hire an independent auditor. The ministry said those that don’t hire outside directors should compile a report on steps they’re taking to boost accountability, such as hiring an outside panel of advisers. The absence of a requirement for independent directors disappoints some overseas investors.


There is no Japanese equivalent of the Sarbanes-Oxley Act, the U.S. law passed in 2002 after Enron Corp. and WorldCom Inc. imploded following accounting scandals. Sarbox, as it is commonly known, requires companies to have a majority of independent board members who must regularly review financial controls on investment risks.

About 80 percent of directors at U.S. firms are outsiders, compared with about 9 percent in Japan, according to data compiled by METI. Yet those Sarbox provisions weren’t enough to prevent the current financial meltdown, says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

“Sarbanes-Oxley was not successful insofar as reducing risk,” he says. “It led to bureaucratic risk analysis, which ultimately failed.”

By not tightening corporate governance rules, Japan may risk losing out on the foreign capital that could help drive the country’s economy out of the doldrums, says Atsushi Saito, president of Tokyo Stock Exchange Group Inc.

“The biggest challenge for the exchange is to win back investors at home and abroad, as the global credit crisis made them risk averse,” Saito says. “Implementing a clear corporate governance standard would be the best stimulus measure to boost stock prices.”


* The story says, "Japan’s gross domestic product grew by an average of 8.4 percent annually from 1955 to 1975," which I never knew. I always knew that Japan grew strongly but didn't think it was that high. I had been skeptical of countries like China and India because they have very high growth rates (7% to 10% real) but, given Japan's performance for 20 years, maybe I am being too critical. I still think China's 10% is way too high but maybe 5% to 7% is sustainable. After the super-high-growth period, Japan slowed down to around 5% in the 70's and 80's, and, of course, down to around 1% in the 90's and 2000's.


  1. It's actually the same for any asian company. Korea, China, Taiwan etc

    The culture doesn't include activism and shareholders are way down the list compared to insiders and the business.

    I was fortunate enough to find a couple cheap Chinese companies and profit but I've decided to stay away for now unless I find something so compelling I have to buy it.

  2. Japan has enacted the Japanese Securities Exchange Law, euphemistically known as JSOX (Japanese Sarbanes Oxley).  It is driving many Japanese managers crazy.

  3. Sivaram VelauthapillaiJuly 31, 2009 at 11:19 AM

    Yep... here is a book review from the Economist which sort of touches on how government meddling and favouratism played a big role in those countries over the decades...

    There isn't a right way for an economy to grow and what happened in Asian counries like Korea and Japan, among others, is just one of the possibilities. However, as investors, we need to be careful. There are very talented, and hard-working businesspeople in those countries but one needs to separate those from the rest...


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