Shareholder activism in Japan continues to evolve at a rapid pace, as activist funds embark on new strategies and previously silent shareholders increasingly engage in dialogue with companies.
Activist events in Japan were up 156% year-over-year in the first quarter of 2024 alone, already reaching 40% of the 2023 total¹. At the same time, private engagements between activists and management continue behind the scenes. This higher level of activity arises from an uptick in international investor interest, corporate governance reforms and pressure on investors for higher returns, among other factors.
Without a doubt, Japan Inc. is seeing new trends emerge within its shareholder base, influencing how executives and boards approach investor engagement and corporate governance. Activists have performance and drive growth to add shareholder value. The approach itself is not new – it was originally coined more than two decades ago by Nelson Peltz, founder of activist fund Trian Partners, who achieved success using this strategy with PepsiCo, among others.
Operational activism often targets underachieving companies with high growth potential, and engagement typically continues over a longer period. Specific demands range from divesting non-core assets and reducing corporate overhead, to structural changes to supply chains, marketing or product development. It is a newer strategy in Japan, where activist funds have traditionally targeted companies in pursuit of shorter-term profits. For Japan Inc., this means that management needs to be prepared to engage with activists over a potentially longer period, which often requires robust activist defense preparation.
Companies that have regular board-led strategic reviews are often better prepared to take action to address these demands, particularly when these actions take time to execute, such as spin-offs or portfolio rationalisation.
Activist proposals gain ground as shareholders become more vocal
At the same time, activist proposals are increasingly being supported by other shareholders. This is often driven by activists taking their campaigns directly to existing shareholders and enlisting their vote of support at upcoming annual general meetings. In a recent activist situation involving Japanese paper milling company Hokuetsu, major shareholder Daio Kaiun expressed support for Oasis Management’s proposal, which included a demand for the dismissal of Hokuetsu’s CEO. In another case, Japanese retail group AEON surprised the market by announcing that it would acquire Oasis Management’s stake in drugstore chain operator Tsuruha, in which it already held a stake. The move will ultimately enable AEON to combine it with its own drugstore business, merging the top two drugstore chains in the country.
Investors across the board are becoming more active, in part due to campaigns by the Tokyo Stock Exchange that have targeted companies which have missed forecast targets and/or trade below book value. International investors, who may have different performance and governance expectations compared with domestic investors, have also been aggressively investing in Japan in recent years. Foreign money flows into Japanese stocks reached JPY 7.69 trillion (US$50.7 billion) in fiscal year 2023, marking a 10-year high². Thus, it is becoming increasingly important for Japanese companies to be able to communicate their strategies and business plans effectively and clearly.
Looking at the 2024 proxy season, Japan Inc. is on track to see another record year for shareholder proposals. As of 22 May 2024, 64 companies had already received shareholder proposals, more than half of the record 112 that received shareholder proposals in 2023³. This trend shows that investors in Japan are becoming more assertive across the board, not just the activists.
What does this mean for Japan Inc.?
With the recent influx of international investors to shareholder rosters, Japanese companies are seeking to enhance their investor relations functions to meet tougher demands for enhanced transparency, proof points to support corporate disclosures and provide opportunities for direct dialogue with board members and senior executives, among other requests.
There are challenges, however. As noted above, global investors often have vastly different expectations and perceptions compared with domestic Japanese investors. In addition, there are cultural and language considerations to be aware of. As a result, it is critical for corporates to have clear engagement strategies to regularly communicate their strategic messages in a clear and consistent manner to stakeholder groups, which include not only investors but also media, regulators, employees and customers. This is especially important as institutional investors in Japanese markets become more active, potentially blurring the line between them and traditional activist investors.
These trends come together to highlight the importance of comprehensive stakeholder engagement strategies. This entails matching deep knowledge of the domestic stakeholder landscape with a nuanced understanding of how to engage with global institutional investors, providing local and international shareholders with an appropriate level of access to board members and staying abreast of governance best practice expectations from investors and proxy advisors across markets.
As the shareholder landscape evolves and greater fund flows enter Japanese stocks, companies in Japan are recognising that their business strategies need to be understood by a truly global investor base.
In the current climate, Japanese companies increasingly see the value in having an activist defense strategy in place, even before an activist shareholder enters their stock. At Teneo, we are already seeing an increasing number of companies in Japan looking to proactively identify vulnerabilities, build clear and consistent investor narratives to address these vulnerabilities and regularly conduct activism preparedness exercises to ensure appropriate defense systems are in place.
This relatively recent surge in vocal and assertive investors, both domestic and international, signals a transformative era for Japanese corporations. To navigate this evolving landscape, listed companies must proactively enhance their strategic communication and governance practices. They must be prepared and willing to engage with and respond to the demands of a rapidly changing investor environment.
¹ CLSA research report titled [Does activism work?] on 29 March 2024
³ Daiwa Institute of Research (DIR) reports published on 15 September 2023 and 5 June 2024
