While Prime Minister Shinzo Abe’s vaunted third arrow — structural reforms — has generally been rated as unsuccessful, his administration has received high praise from Japan analysts for shaking up the country’s corporate management system.
The nation’s companies have gradually moved toward accepting the need to listen to shareholder concerns, and to deploy record stockpiles of cash with their interests in mind, since Abe took office in 2012. But many have not done so willingly, and now some are fighting back.
The clever work-around strategy that some are deploying involves buying back their own shares, then transferring them to a charitable foundation loyal to top management. The maneuver helps make them less of a target in an environment where some investment funds are looking to push Japanese businesses to invest or return more of their ¥255.3 trillion worth of cash.
“This practice poses a considerable risk of increasing shareholders who favor management, which is negative in terms of improving shareholders’ value,” said Jiro Nakano, head of equity-fund management at Nikko Asset Management Co. in Tokyo. “Why don’t they simply give cash to their foundations?”
Nakano’s comments alone represent something of a corporate-governance change in Japan. Nikko Asset Management, which manages about ¥20 trillion, began revealing in August how it votes in shareholder ballots and posting the results on its website. Since June it has voted at least twice against (ultimately successful) proposals to transfer shares to charitable foundations.
Nomura Asset Management Co. fought against four such moves, including one from machine tool maker DMG Mori Co. that transferred 3.5 million shares (representing about 3 percent of stock outstanding) to a trust company for the benefit of a foundation headed by Masahiko Mori — the same executive who serves as president of the Nagoya-based company. It is buying back a similar number of shares from the open market.
According to the company, the tactic lets it make corporate and social-responsibility contributions in a tax-efficient way for shareholders. The government only allows limited tax deductions for such contributions. After the transaction, the nonprofit receives dividends to fund its activities.
Opponents say the main result is a more management-friendly shareholder structure, in a blow against decades of efforts by Japanese reformers to pressure companies into reducing their cross-shareholdings. The thinking is that without more dynamic ownership, Japan’s businesses will be content to stock up on cash — hurting investment and wages. And it’s one reason cited for Japanese equities lacking the valuations found in other developed nations.
“This practice isn’t good,” said Takeyuki Ishida, head of Japan research at proxy adviser Institutional Shareholder Services Inc. “Even if cross-shareholdings have decreased, an increase of this practice could provide similar effects. In that sense, this could become a loophole.”
ISS recommended voting against the DMG Mori move, among others it has opposed. DMG Mori countered that the foundation “is not a stable, or management-friendly, shareholder,” despite Mori being the head of it. The foundation will have “no claim” on the voting rights because the trust bank that holds the shares will exercise those rights, the company said.
Similar fights have occurred this year at Daiken Medical Co., sportswear maker Goldwin Inc. and Kobayashi Pharmaceutical Co. The practice spread after Toyota Motor Corp. set up the Toyota Mobility Foundation and transferred treasury shares to a trust bank to support it in 2014, while repurchasing shares to avoid dilution. KDDI Corp. did the same thing the following year.
Not all proxy advisers oppose these moves across the board.
Glass Lewis recommended against the proposal by Daiken Medical but supported those from DMG Mori, Goldwin and Kobayashi, it said an emailed response to questions. Among its key concerns was who exercises voting rights; in Daiken Medical’s case it did not intend to establish a trust to hold the shares, but planned to distribute them directly to foundations it set up.
Daiken Medical, Goldwin and Kobayashi Pharmaceutical echoed DMG Mori in saying their transactions are not aimed at creating management-friendly shareholding structures.
Even so, longtime Japan observers see the moves as evidence of the old guard fighting back at a time of popular pressure to embrace corporate-governance change.
Foundations funded by their corporate creators’ shares are “very unlikely to cast any votes which challenge the management,” said Alicia Ogawa, director of Columbia University’s project on Japanese corporate governance. “I’m pretty pessimistic,” about Japan’s efforts to change, she said. “I see a lot of frantic moving of deck chairs and a lot of box-ticking” on the reform front. “But there is no strategy behind any of this at the company level, and a lot of it is completely lip service.”
Shareholders aren’t giving up in pushing for more say, cheered on by the Abe administration and the Government Pension Investment Fund, which has mounted soft-pressure surveys on investor relations practices. With Nomura and Nikko — two of the top three investment trust management companies in Japan — now unveiling their votes, transparency is spreading.
And numbers suggest that some progress has been made.
Cross-shareholdings held by Japanese companies, including banks and insurers, stood at 15 percent of the market’s value in the fiscal year that ended in March, hitting record lows for a sixth year according to Nomura Holdings Inc. That’s down from 51 percent in fiscal 1990.
Yet shareholders who favor management still have a significant presence in Japan, and the transfers to foundations may contribute to that.
More than 40 percent of listed Japanese companies said shareholders who would support their proposals hold more than half of voting rights, according to a Financial Services Agency report published last month.
“It is a direct violation of the corporate governance code — the intention is to distribute shareholder wealth to a foundation for the benefit of the controlling shareholders,” said Jamie Rosenwald, who heads the $3.1 billion hedge fund Dalton Investments in California. “Isn’t this simply a form of stealing?”