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Shareholder Spring Comes to Japan… at Least at Mizuho Financial Group
By Nicholas Benes – Representative Director of The Board Director Training Institute of Japan
(This is the first of a two-part blog posting on the Shareholder Spring in Japan as evidenced at the Mizuho Financial annual meeting)
2012 seems destined to go down in history as the year when “shareholder spring” not only took root in Europe and the U.S., but also in Japan as well. In the wake of risk oversight errors by TEPCO and massive fraud by Olympus, in June of 2012 a significant number of Japanese individual shareholders joined foreign investors in voicing their distrust of current corporate governance practices at annual general meetings (AGMs).
It seems to me that more individuals than ever before were taking action by submitting shareholder proposals, voting against proposals submitted by management, or voting in favor of proposals submitted by other shareholders.
The change in the wind could be felt not only at the shareholder meetings of the electric power companies beset by the “no nukes” movement, and not only at lesser-known companies mired in founder-family politics. Household name-companies like Nomura Holding and Mizuho Financial Group received numerous shareholder proposals, – fully 18 by Nomura, and 10 by Mizuho. Not all the proposals were “wacko” or about environmental issues unconnected to economics. Many related to legitimate shareholder concerns about corporate sustainability, oversight, managerial incentives, and governance.
Even though change is usually slow in Japan, there are several reasons why Japan’s “shareholder spring” is likely to accelerate.
First, as a general matter, Japan’s Company Law gives shareholders very strong rights. To be eligible to submit a shareholder proposal, one needs only to hold the lesser of 1% of the company’s issued shares or 300 “units” of stock. Especially at current stock prices, 300 units is a number well south of US$10,000 in most cases. Furthermore, unlike the U.S., which allows management to exclude proposals to nominate or terminate directors from the proxy materials, Japan freely allows such proposals irrespective of what management wants. In fact, Japan has very few rules clearly allowing the exclusion of shareholder proposals from proxy materials. It also requires shareholders to approve aggregate board compensation, which in Japan is the equivalent of a binding “say on pay” vote.
The result is a more powerful legal infrastructure to promote “shareholder democracy” than exists in many other countries. After decades of almost total neglect, this infrastructure is now being used by shareholders.
A second factor is that individual shareholders have been growing in numbers for more than 10 years, and now comprise about 30% of all listed company shareholders, a figure that is even larger than the approximately 26% held by foreign shareholders. Proactive individual holders in Japan are now waking up to the fact that if they vote similarly to foreign institutional holders on governance and sustainability issues, together they will comprise a formidable force. Even if they are not “activists”, many Japanese individual shareholders are becoming much more “involved” than before, and willing to vote “no” on certain agenda items. Surveys show that as many as 30% or more are interested in personally attending AGMs, and estimates of the shareholders who vote most of the shares they hold range from 35% to as high as 80%. (Voting rates increase depending on the company or the intensity of feeling about the issue at hand.)
Third, the trend of “more shareholder proposals” has actually been gathering steam for the past ten years. As of 1992, shareholder groups or individuals only submitted proposals to about five or ten companies per year. Most of them were related to the anti-nuclear movement. But in 2010, more than 40 different firms received shareholder proposals, about a broad range of topics. This year it seems likely that the number will top 50 or 60. For Japan, this is a huge change, the sort which encourages others to lose their shyness.
Last, but certainly not least, stock prices in Japan are incredibly low, because after the financial crisis they sank more but did not recover as much as the U.S. market. In any country, no one likes to sell stock he bought for 4,000 Yen for 400 Yen, especially if that current stock price (as is the case for 67% of TOPIX companies) is trading well below net book value per share. When stock prices are this low, those shareholders who rationally think the company must have much higher intrinsic value and can afford to be patient (e.g., retirees who bought many years ago), tend to voice theircomplaints rather then sell.
What Was Different in 2012?
A confluence of scandals and value-destroying events during the past 18 months has raised the level of investor involvement and activism. In a nutshell, here is what was different in 2012:
1. Fukushima made people angry. In the Fukushima crisis, Japan had its own glaring, scary example of the huge destructive potential that arises when a company’s governance and risk management oversight does not independently consider issues that impact “sustainability” enough, and assumes that anything it can get approved by the regulators is acceptable. Said another way, the Japanese public had a domestic case of massive “risk externalization” to ponder over, similar to BP in the Gulf of Mexico or the bankruptcies of Lehman and AIG. (Note: the exact same issue is now brewing in the area of asbestos used in construction materials, where the ISO has pointed out that Japan’s present detection methods are “insufficient”.)
2. The very topic of “corporate governance” was constantly in the news. Whether it was Olympus, Daio, Kyushu Electric’s political tampering, the third amendment of the Company Law in 10 years (still ongoing), or movements abroad such as “Occupy Wall Street” and “say on pay”, the public was constantly reminded that there seemed to be something wrong with the state of corporate governance. And with Japan’s price-book ratio (.9) at a level that is half the average for developed nations, many investors did not need much of a reminder. For the first time, not all of the people putting forth shareholder proposals were unknown individuals who could be dismissed as “fringe elements”. Led by the popular Governor Hashimoto, the city of Osaka (as an 8.9% stockholder) submitted proposals to Kansai Electric and made critical statements at the latter’s AGM, and Vice-Governor Naoki Inose of the Tokyo Metropolitan government led the charge for Tokyo (a 2.7% holder) to submit four proposals to TEPCO’s shareholder meeting. These gentlemen repeatedly appeared on television to explain their opinions. For the first time in memory, making shareholder proposals was treated by the media as a legitimate procedure worthy of coverage, whereas when anti-nuclear groups made proposals in earlier years, they were completely ignored.
3. Most notably, a number of proposals were of “eminently reasonable” type rather than the “personal grudge” or “purely political” type, and it was these proposals that received more support from other shareholders. They suggested changes that many investors could agree with in terms of corporate sustainability, improved governance, or enhanced investment efficiency, rather than unrealistic things like the immediate stoppage of all nuclear power generation. The result was higher levels of voting support for the “eminently reasonable” proposals.
Because of a new FSA rule requiring disclosure of per-item vote counts, this higher level of voting support was immediately disclosed and therefore publicly visible. Japan’s shareholder spring will now tend to accelerate because proposing shareholders have received clear feedback, for the first time, that reasonable proposals can attract enough voting support that they might actually have an impact on the stance that managers take in response, for example by provoking a change from flat ”no” to “let’s compromise where we can”.
To be continued….
Nicholas Benes is Representative Director of The Board Director Training Institute of Japan (BDTI), a non-profit “public interest” organization certified by the Japanese government to provide training and education about corporate governance and related matters. In order to maximize its impact as a change agent, BDTI needs the support of investors in the Japanese market. http://bdti.or.jp/english/introduction. Contact: firstname.lastname@example.org.