Shareholder activism in Japan remains buoyant this year, although the numbers so far indicate it is likely to be slower than 2020, a pandemic year. According to Activist Insight Online data, 36 Japanese companies have been publicly subjected to activist demands so far this year, compared with 41 during the same period last year and 45 in 2019. As the Japanese proxy season nears its end, Japan is unlikely to see higher activity during the second part of the year. Unlike the U.S., Europe, and the U.K., the Japanese proxy season is more pronounced during the spring and early summer.
Aside from the groundbreaking proxy contest at Toshiba - where Effissimo Capital Management won a shareholder vote on a proposal to conduct an independent investigation into potential wrongdoing at last year’s vote that paved the way for the departure of CEO Nobuaki Kurumatani – there were few notable, large-cap engagements. Indeed, so far this year, only two large caps were publicly targeted versus nine in the same period in 2020.
Yet there may be more progress than meets the eye. As Japanese managements and boards are becoming more accustomed to activism, a lot of activity remains behind the scenes. Asset Value Investors, which has around $700 million invested in Japan mainly across two closed-end funds, targeted seven companies this year, but only three became publicly known, Daniel Lee, a senior Japan analyst at the activist investment firm, told me this week.
Lee said behind-the-scenes engagement with four companies was successful, and as a result the fund agreed to withdraw its proposals and keep their names private. The solutions these four companies came up with include dividend increases, share buybacks, and changes to executive compensation, as well as one going private, Lee said. Asset Value’s campaigns at Tokyo Radiator Manufacturing, SK Kaken, and NS Solutions "went public because managements and their controlling shareholders failed to make satisfactory changes for the benefit of minority shareholders," Lee said.
Mason Morfit’s ValueAct Capital Partners engaged with two Japanese companies this year, including a leaked campaign for a breakup at Seven & i Holdings, a retail giant that was targeted by Third Point Partners in 2015 and Oasis Management in 2020.
Changes To Japanese Corporate Governance Code And TSE Listing Standards
Upcoming changes to the Japanese corporate governance code and Tokyo Stock Exchange listing standards should ensure activism remains lively, either publicly or behind the scenes. In April 2021, Japan’s Financial Services Agency proposed a series of changes to the initial corporate governance code adopted in 2015, including increasing the number of independent directors on boards to at least a third, up from two, the establishment of a nomination and remuneration committee, increased board diversity, and enhanced disclosures on sustainability and ESG.
Alicia Ogawa, a corporate governance expert on Japan at Columbia Business School, told me this week that the changes to the corporate governance code do not go far enough partly because compliance is still voluntary. However, Ogawa notes that "Japanese companies are learning that the sheer number of active and activist investors now in the Japanese market make enforcement of the codes, however legally weak they might be, mandatory."
And as more stringent listing standards by the Tokyo Stock Exchange will come into force next April, companies that feel they might not make the cut are already rushing to make changes. An Asset Value target decided to execute a go-private transaction primarily because of the pending reform, Lee said. If M&A is not the preferred route, companies that don’t comply with the new requirements will have to improve their corporate governance and shareholder communications, among others.
Institutional investors, meanwhile, are becoming more supportive of dissidents. According to Proxy Insight Online, the average support for shareholder proposals increased from 8.9% in 2015 to a record high of 20.7% in 2020. This year, average shareholder support for dissident proposals is at 17.1%, although many annual meetings are yet to be held.
Iuri Struta, Vice President, Activist Insight Vulnerability
Pressures For Board Diversity Rising
Insufficient progress on board diversity is being regularly cited as a reason for investor opposition towards director elections. Companies in countries which have yet to establish stringent board diversity regulations, such as the U.S., may find themselves subject to pressure to meet the diversity thresholds expected of their international peers.
The Hampton-Alexander Review is one of the better-known examples of these policies, which called on FTSE 350 boards to feature a minimum of 33% female representation by December 2020.
Of the five U.K. companies that have experienced the highest level of opposition towards director elections this year, three were directly related to a lack of board diversity, according to Proxy Insight Online data.
FTSE 250 finance company IntegraFin faced the highest level of opposition toward director elections at a U.K.-listed company so far this year. Chairman Richard Cranfield faced 38.1% opposition, while his fellow nominating committee members Michael Howard and Neil Holden were subject to 49% and 33.2% opposition, respectively, for failing to meet Hampton-Alexander Review standards.
A lack of engagement with board diversity concerns was also cited by Legal & General Investment Management and Schroders when opposing the re-election of AFC Energy and Allied Minds nominating committee members, who narrowly scraped majority support at their respective annual meetings earlier this year.
Issuers should be wary that, just because similar board diversity policies are not necessarily enforced in their country, it doesn’t mean investors won’t also expect similar levels of diversity on their boards. Despite no equivalent to the Hampton-Alexander Review being enforced across the U.S., investors are frequently calling on U.S. companies to meet the standards required of their European counterparts.
Opposition Towards Director Elections
In the first five months of 2021, six of the 10 U.S.-listed companies that faced the most significant opposition towards director elections were directly due to board diversity concerns, according to Proxy Insight Online data.
Nominating committee members at American Finance Trust and Tutor Perini received upwards of 45% opposition, owing to both boards featuring fewer than two women and two ethnically diverse directors, while Carriage Services and Gladstone Commercial investors criticized both boards for failing to maintain a minimum of 30% board diversity.
The COVID-19 pandemic highlighted the importance of social equity to investors internationally, while the Black Lives Matter protests last year further accelerated engagement regarding diversity, equity, and inclusion (DEI) issues.
"We recognized that companies that weren’t tackling this issue effectively would potentially have a higher risk profile," said Robert Walker, global co-head of asset stewardship at State Street Global Advisors (SSGA), in an interview with Proxy Insight Online. "For the first time this year, we are asking S&P 500 companies to disclose the racial diversity of their board. We will be taking voting action against S&P 500 companies that don’t have at least one director from an underrepresented community, starting in 2022."
BlackRock Steps Up Its Engagement With Board Diversity
BlackRock has also stepped up its engagement with board diversity, voting against 9% of director-related management proposals at U.S.-listed companies in the first quarter of 2021, compared to 8% the previous year, according to its global first-quarter report.
As part of the asset manager’s newly established key performance indicators (KPIs), which it will use when assessing portfolio companies in 2021, BlackRock expects companies to "disclose their approach to ensuring appropriate board diversity and, in those markets where we consider demographic diversity a priority, disclose a demographic profile of the incumbent board."
For this first time this year, Vanguard also announced it may vote against nominating committee members at U.S. companies where there is a "lack of sufficient progress on board diversity and board diversity disclosure."
As best practices concerning board diversity continue to evolve and become broadly implemented in Europe, similar expectations will soon reach their American counterparts. The sooner U.S.-listed companies familiarize themselves with the expectations placed upon their neighboring boards, the sooner they can implement strategies to attain similar goals, or risk facing increased opposition from investors.
Rebecca Sherratt, Corporate Governance Editor, Insightia