Activist shareholders threaten Japan’s AGM season

Every year, the June corporate annual general meeting season in Japan stands as a reminder of the delicate equilibrium in which the Tokyo market operates: shareholders are granted immense disruptive powers, but have been reliably reluctant to use them.

There have been many predictions that this balance might eventually crumble, though it has long held firm. But AGM season 2023, say both companies’ investor relations departments and investors, already feels as if it will be different. 

At the most visible end, there are more shareholder activists targeting Japanese companies than ever before, and several of them, such as Elliott, have prominently expanded their Japan teams since 2022.

Mizuho Securities and others are forecasting that the season will see Japanese companies confronting a record number of proposals from shareholders. Their approach is also shifting: where previously they issued blunt demands for share buybacks and quick asset sales, many now push for systemic shifts in capital allocation, climate policy and transparency.

But a more fundamental challenge is also gathering strength from the traditional end of asset management. This is bound by an increasing list of rules-based mandates to hold companies to account on grounds of board diversity and ESG, and threatens to unleash at least some of that long-underused shareholder power on chief executives who fail to address their governance shortcomings.

Japan’s AGM season has always been eye-catching, often for the wrong reasons. Because such a high proportion of the country’s companies — 2,283 is the current tally — end their financial years at the end of March, June is an obvious time to hold shareholder meetings after the business of full-year reporting and the registering of proposals is done. 

But this has been taken to extremes. Back in the mid-1990s, 96 per cent of companies held their AGMs on the same day in June. These days, given the intensifying need to appear shareholder-friendly, the season is slightly more spread out: just under 80 per cent of companies hold meetings over seven days at the end of the month.

Behind that clustering is a technical fear. Japanese companies do not, by convention, have staggered boards, and in the case of almost all of them, shareholders are called upon to elect the directors, including the chief executive as representative director. In theory, given that any one of these could be ousted by a support rate of below 50 per cent, that means every year’s AGM comes with the notional threat of a total wipeout of a company’s gubernatorial bench.

For decades, this theoretical risk was offset in ways that allowed chief executives to sleep easy. Friendly companies formed latticeworks of “allegiant” shareholders who, in combination with docile investor bases, in effect guaranteed that support rates for nominees would arrive in the very comfortable 85 to 95 per cent zone.

But companies can now see that changing rapidly, as stewardship obligations force pension funds and life insurers to be less docile and old habits, such as having boards without a decent contingent of independent members, now create vulnerability for CEOs.

Those companies whose financial years end in December have already held their annual meetings, and the struggles that some have had with investors now stand as a warning to the thousands of others holding their meetings over the next four weeks. Fujio Mitarai, the chief executive of Canon and a towering figure in corporate Japan, scraped through with just 50.59 per cent support. Major shareholders, including BlackRock, voted against Mitarai because Canon currently has no female directors and he was held responsible.

The top management of retailer Seven & i Holdings survived more comfortably, but only after a sustained attack from the US activist fund ValueAct Capital and intensive efforts by the company to win over shareholders. Those efforts included extensive presentations to investors in Europe and the US, and set a precedent that others have followed. 

Fund managers contacted by the Financial Times report an extraordinary flurry of meetings with the investor relations departments and CFOs of Japanese companies that now feel threatened in the upcoming AGM season, and are seeking to protect their chiefs from a sub-50 per cent vote. The ideal situation, those fund managers add, is that the threat alone triggers improvement: Japan’s equilibrium remains, but with better-governed companies on one side, and less docile investors on the other.

leo.lewis@ft.com