By Junichi Takayama, Japan Equity Investment Director
Once considered taboo in Japan, shareholder activism has been evolving. Japanese equity market culture has been changing dramatically, enabling shareholders to be more vocal and sometimes even hostile towards the companies they invest in, all in the name of ‘shareholder engagement.’ Ten years ago, there were just eight activist investors targeting Japanese companies. But as the chart below demonstrates, that number had increased to 73 by 2024, as more activist investors began to recognise the attractiveness of the Japanese market. Moreover, the number of activists and shareholder proposals has more than doubled and quadrupled, respectively, since (pre-COVID) 2019.
Shareholder activism also now comes in many forms. This includes the old-school ‘greenmailer’ asset-strippers, participation groups focused on constructive boardroom engagement, and other investors choosing to take a hands-on approach to initiate change. There is even a Japanese retail fund employing an activist strategy.
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Shareholder activism and stewardship have become bedfellows
Crucially, the lines between shareholder activism and stewardship are increasingly blurred, particularly due to the increased prevalence of environmental, social and governance (ESG) considerations at boardroom level. In recent years, there has been lower support for re-election of board members, particularly where companies are facing issues related to capital efficiency. Moreover, certain shareholder proposals are gaining increased support from other shareholders.
The consequences of this have become increasingly clear for all parties. When activist investors choose to champion issues considered to be in the collective interest of all shareholders, they can now expect to gain support from institutional investors sharing the same concerns and required by the Stewardship Code to act in the best interests of their clients. In other words, activists now have the increased leverage required to make things happen.”
Chart 1: Number of activist funds and shareholder proposals
Source: IR Japan as of August 1, 2024
Improved dividend prospects for investors
One of the ways in which shareholders have been able to flex their collective bargaining power has been in the form of boosting shareholder distributions, particularly increasing dividend payments. Traditionally, minority shareholders in Japan had very little presence, and when it came to efforts to increase shareholder distributions, requests were often ignored. Unsurprisingly, investor return on equity (ROE) in Japan had been historically low by international standards. However, since the new governance era began post-2015, foreign investors, activists and domestic institutional investors have been given a more leading role. As a consequence, Japanese companies are now placing a higher priority on those shareholders, and improving their efforts to return more capital to them, which also leads to higher capital efficiency.
At the same time, corporate Japan’s longstanding conservative approach to cash preservation means that a great many Japanese companies are still sitting on significant excess cash levels, leaving plenty of room for further shareholder distributions. The concept of boosting shareholder distributions has been accelerated by actions from the Tokyo Stock Exchange which, in March 2023, requested listed companies improve their capital efficiency. So far, this move successfully encouraged companies to set higher dividend payout targets and/or share buybacks, especially in April and May 2024 to coincide with their full-year earnings. (It is also worth noting many companies wasted no time in making buyback announcements during the market turbulence in August 2024).
Japan’s keener focus on dividend growth
Another key indicator of Japan’s readiness for more accommodative shareholder engagement is the more strategic approach to dividends being adopted by many Japanese companies. An increasing number of companies are now adopting what they call a “progressive dividend system” where companies plan to grow their dividend over time, while putting a floor on dividend payments. In addition, the so called “dividend on equity” target is also gaining traction which has the effect of stabilizing dividend growth over time, thereby removing uncertainty for investors. High dividend stocks not only deliver attractive and consistent income, but also offer lower interest rate sensitivity and can provide downside protection. This makes them particularly appealing to a wider range of investors seeking both growth and stability in the form of capital and income gains.
Management buyouts are surging
Increasing pressure from shareholders, and the wider market, has been driving company management teams to consider taking their companies private. In fact, as the chart below shows, 2023 was a record-breaking year in terms of the transaction value of Japanese management buyouts (MBOs). This is also another way companies are unlocking value.
Chart 2: Number of MBOs and Transaction Value
Source: Bloombergas of December 2023
Summary
The rise in shareholder proposals, the changing dynamics at Annual General Meetings (AGM), the increase in MBOs, and the strategic use of dividends all point to a significant shift in Japan’s corporate governance culture and have encouraged equity investors to become even more vocal. The more transparent, competitive and dynamic environment has helped build better businesses now more dedicated to maximising shareholder value. At the same time, Japan’s current dividend yield level, and the potential upside in dividends compared to the US, make it an increasingly attractive destination for income-seeking investors. It would seem that Japanese investors today have plenty to shout about.
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