Major shareholders of listed companies in Japan — often institutional investors such as financial firms — were long considered stable shareholders who rarely spoke out on the management and operations of these businesses. This has been changing in recent years, in particular regarding foreign investors who are taking bigger stakes in Japan’s listed firms. For many Japanese firms, perhaps except those mired in scandal and financial trouble, annual shareholders’ meetings, most of them held in June, used to be generally quiet and uneventful. But with the greater emphasis on improved governance and transparency in corporate management, top executives are starting to face sharp questions about their operations from shareholders.

Through their input, shareholders can help reform the management and operations of the companies they invest in. While shareholders may as a habit seek higher prices of their shares and greater dividends, it is also important for them to make proposals that will enhance long-term, healthy growth of the companies, instead of maximizing near-term benefits. Shareholders should also keep in mind that businesses only achieve sound growth after making serious efforts to respond to consumers’ demands, and that consumers’ interests should be as important as those of shareholders.

In March last year, the annual shareholders’ meeting of furniture retailer Otsuka Kagu Ltd. drew heightened media coverage due to the culmination of a rare feud within the firm’s founding family — between the founder and chairman, Katsuhisa Otsuka, and his daughter and the firm’s president, Kumiko Otsuka — over sales policy. Behind the daughter’s survival of that meeting was the weight of votes by institutional investors such as insurance companies and pension funds that made clear their support for the president’s proposals.

Last month, Toshifumi Suzuki, the charismatic leader credited with introducing the convenience store business to Japan, stepped down as chairman and chief executive officer of retail giant Seven & I Holdings Co. after his proposal to replace the president of the group’s convenience store unit, Seven-Eleven Japan, was voted down by the group’s board. While Suzuki reportedly made the decision to resign after he failed to win the endorsement of his proposal by the group’s founding family, it was the U.S. hedge fund Third Point that first raised the red flag over Suzuki’s management shake-up plan. The New York-based fund led by activist investor Daniel Loeb, which announced acquisition of a major stake in Seven & I last year, had been urging its board to separate the struggling Ito-Yokado supermarket chain from the group to improve its corporate value and opposed Suzuki’s bid to ax Ryuichi Isaka as head of the profitable Seven-Eleven operation.

According to the Tokyo Stock Exchange, foreign investors owned 31.7 percent of shares in listed Japanese companies as of the end of March last year. The ratio has been rising year by year and is now estimated to have topped that of Japanese financial institutions, which used to be the major shareholders in many companies. It would not be surprising if the influence of foreign capital on the management of Japanese businesses is increasing.

Up until several years ago, there were cases in which foreign investors made unreasonable demands in attempts to raise share prices and make huge profits by selling off their stakes. In more recent years, some of these investors have made constructive proposals that would help increase the companies’ long-term gains. The management of Japanese firms cannot remain content by just trying to fend off the pressure from such investors.

Last June, the TSE began urging the 1,858 firms listed on its first and second sections to comply with a corporate governance code that spells out 73 principles designed to help them make transparent, equitable and quick decisions by taking into consideration the interests of shareholders, customers, employees and local communities. In January, the exchange reported that 216, or 11.6 percent, of the firms had implemented all of the principles, while 78 percent had adopted more than 90 percent of them. Listed companies can no longer shun dialogue with their shareholders and need to respond to their proposals with sincerity.

Annual shareholders’ meetings at many Japanese companies still remain an event where management and operational proposals are endorsed as they are put forward. But shareholders making constructive proposals to increase corporate value, on the one hand, and the companies’ leaders and executives responding to them with sincerity, on the other, will create healthy tension between them, which in turn can trigger the process of reform that the companies need. Shareholders in Japanese firms should not hesitate to make more proposals to spur management reforms, instead of focusing on quick profits that might harm the companies’ long-term performance.

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