Asia | Japanese Corporate GovernanceJapanese Corporate Governance | Asia

Japan’s shareholder
rights and the armsof the revolution
Seth Fischer

Founder and Chief Investment
Officer of Oasis

JA focus on return on equity
will invigorate Japan’s
corporate culture and revive
growth, writes Seth Fischer

other groups, which offer teaching courses on beinga director – including financial literacy, governancetheory, legal responsibilities and the best practices
set forth in the Corporate Governance Code. Basedon the Corporate Governance Code, directorshiptraining covers topics that include:
directors using objective
1 Nominating
criteria and a fair and transparent processrole of the board in setting strategy
2 Theand goals, including financial metrics,Together, these two ‘wheels of the cart’, asdubbed by Japan’s powerful Ministry of Economy,
Trade and Industry, establish the framework todrive this revolution forward. They will, incombination with the strong shareholder rights
provided by Japan’s Companies Act, ‘functionas ‘invisible hands’ inf luencing a company’sdirectors, management and engaged shareholders.
And they will be most the powerful andeffective when they work together.
On the ‘corporate’ side of the equation, internaland external directors are now offered training at
the Board Director Training Institute (BDTI) andapan’s return on equity (ROE)
revolution is now underway
and is evolving into a revolution
in corporate productivity
and return on investmentu n d e rpin ne d by Ja pa n’s
Corporate Governance Code,which established fundamental principles
for governance at listed companies inJapan, and Japan’s Stewardship Code,which established p rinciples forinstitutional investors.

such as ROE and ROIC (return on investedcapital), and independently monitoring
progress towards those goals
Continuing training and updates on
emerging issues for existing board

3

members and development of successors forthe executive team and the board
Setting the company’s culture and‘tone at the top’ and living by thoseprinciples, including assuring full protection
for whistleblowers
Self-review by the board as a groupand of committees and individual
directors. Analysing shareholder objections/suggestions when they are voiced and taking
action as appropriate
Adding new viewpoints to the board
by increasing diversity, such as byincluding women and foreign nationals
Establishing an independent advisorycommittee to handle compensation,
nominations and other matters for which
the interests of management can diverge fromthose of the company
Appointing a lead independent
director to facilitate communication
between the directors, shareholders,
employees and management
Appointing more than one third of theboard as independent directors in orderto facilitate the above measures, as isencouraged for global companies by thecorporate governance code (currently theCorporate Governance Code calls for only twofor ‘comply-or-explain’ purposes, but I thinkthat will change to include more in the future)
Ensuring appropriate and timely
public disclosure of all relevant

4

Based on my own informal survey, many fund managers
have no idea of the breadth of tools available to themto improve corporate governance at their companies

5

information to shareholders, including
actual governance practices and the detailed
reasons for any non-compliance with theCorporate Governance Code6

Tools to improve governance

78910

In intensive courses and seminars teaching bothbasic knowledge and leading-edge governancepractices, BDTI and others are spreading thek nowhow that Japanese boards and theirdirectors will need in the new environment. The
velocity of change at Japanese corporate boards
is increasing (albeit from a slow start). The otherwheel of the cart is the shareholder, of course.
Contrary to popular wisdom when it comesto shareholders, those interested in fulfilling
their duties as signatories to the Stewardship
Code to help improve their portfolio companies
for their best long-term interest are blessedwith some of the best tools in the world: thestrong shareholder rights set forth in theCompanies Act.
Based on my own informal survey of Japaneseinstitutional shareholders, many fund managers
have no idea of the breadth of tools available tothem to improve corporate governance at theirportfolio companies.

Under shareholders statutory rights, investors
in Japan are blessed with the ability to essentiallyrequest as much information as is reasonably
necessary from their companies. Usually thisinformation can be sought from the company’s
investor relations team and senior executives
but, if necessary, investors can also use the courts
to enforce their rights. An investor holding justthree per cent of a company’s shares can apply
to inspect or make copies of the company’s books,
records and documents, as well as appoint aninspector to investigate the affairs of thecompany and the state of its assets.
A shareholder holding just a single share canmake copies of the register of shareholders, articles
of incorporation or minutes of shareholder
meetings and board meetings; demand thecompany purchase shares of the shareholder at
the time of a merger (appraisal rights); exercise
tag along rights (the rights to demand repurchaseof one’s shares in the event the companies decides
to purchase shares from another shareholder); andpursue derivative suits or double derivative suits(suits requiring holding companies to seek
accountability by directors at major subsidiaries).
Furthermore, an investor which has held either
300 units or one per cent for at least six

japan’s revolution
Corporate reforms are
empowering shareholders
and spurring profits
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Asia| Japanese Corporate Governancefocus on roe
Emphasising profits onshareholder capital will
drive corporate efficiency

months as a shareholder of record can put
forward at the annual shareholder meeting(AGM) an unlimited number of proxies, as longas they are for a decision at that meeting. The
potential ‘reach’ of proxies is a matter which isbroadly defined. For example, such proxies caneven be used in support of a specific proposalthat relates to a corporation’s ordinary businessdecision-making as long as it is relevant to a
general proposal, including a proposal to grantshareholders authority over the issue.
Historically, these strong shareholder rights
have been used mainly by shareholders without
a financial agenda but rather a very specific
EGS (environmental, governance and social)agenda, usually one related to nuclear power,
anti-capitalism or similar issues. Most ofthese demands have been quickly dismissed assuch by investors, including the infamous
tongue-in-cheek Nomura ‘Yasai’ proposal tochange the name Nomura Holdings to Yasai
Holdings (‘Yasai’ is a vegetable in Japaneseand the Chinese character used in for ‘Ya’ isthe same as the ‘No’ in ‘Nomura’). It did not cometo fruition.
In the extreme case, extraordinary shareholder
meetings (EGMs) can be called at any time by asix-month, three per cent shareholder. AtAGMs (and EGMs if proposed), directors canbe voted out if they do not receive a majority of
votes cast. Such a vote occurs at most companies
every year anyway, since most director terms
are now only one year in length (as opposed tothe US, the maximum possible term in Japanis two years). Thus, termination or low voting
support ratios will be akin to a vote of ‘noconfidence’ in the board itself.
It is anticipated that at some companies
this will be the impact of a new policy from
Institutional Shareholder Services (ISS) torecommend a vote against the senior director if
the ROE of the company has averaged under five
per cent for the preceding five years. A little
known fact is that Satoru Iwata, the CEO ofNintendo, only received 78 per cent of the votelast year. This year, if there wasn’t a substantialchange in strategy, which there now has beenwith Nintendo’s change in the company’s mobile
gaming strategy, his tenure was at risk.

Empowered shareholders

I believe that we will now see these rights
utilised more frequently and constructively
by financially motivated investors, which comprise

The invigoration of both investors and companies asa result of the Stewardship and Corporate Governance
Code will make the Japanese market one of the bestplaces in the world to be a long-term equity investor
110

Ethical Boardroom | Summer 2015

the vast majority of registered shareholders
at almost all Japanese public companies. As ofMarch 2015, 184 institutional investors including
the Japan Government Pension Investment
Fund (GPIF), the Japan Pension Fund Association(PFA), all the major life insurance and investment
managers (including my firm) have signed
the Stewardship Code, which reinforces thedual concepts of (a) shareholding as primarily afinancial investment to ‘enhance the medium andlong-term investment return for their clients’(beneficiaries) and (b) a duty of engagement,
including voting as one of the most important
methods for enhancing the value of investments,
Japan’s sleeping giant, its shareholder base, iswaking up from its long slumber.
For this reason, I believe that the invigorationof both investors and companies as a result ofthe Stewardship Code and the Corporate
Governance Code will make the Japanese market
one of the best places in the world to be a longterm equity investor.
But don’t just ta ke my word for it . The
Stewardship Code and the Corporate Governance
Code were adopted as national policy by thecabinet in Ju ne 2013 as pa r t of its Japan
Revitalization Strateg y, which carried thesubheading ‘Japan is Back’. The Stewardship Codeitself proclaims that “[by] fulf illing theirstewardship responsibilities investors will beable to contribute to the growth of the economy
as a whole”. I couldn’t agree more.
This means that for international investors,
Japan is, indeed, back.