Anyone who thought shareholder activism would never take root in Japan had a rude awakening at Toshiba’s extraordinary general meeting last month. An investor revolt on March 18 saw Singapore-based activist fund Effissimo Capital Management, the largest shareholder of the Japanese behemoth, force an independent investigation over irregularities it says occurred at Toshiba’s general shareholder meetings in 2020. It was a watershed moment for Japan, Inc. The adoption of the activists’ proposal with the backing of nearly 58% of voters sent shockwaves through boardrooms across the country. It also sent a clear message that traditional Japanese corporations are not immune to the kind of public dressing-down that their US and European counterparts have long grown accustomed to.
Japan’s system of corporate governance has traditionally consisted of shareholders largely serving as silent, deferential partners to the board. But investors have been growing increasingly confident and are proving more and more willing to publicly challenge corporate managers’ decision-making.
And while activist investors are much more common in the United States and Europe, their shareholdings have been steadily increasing in Asia, with Japan’s capital markets becoming an important destination for such funds.
It may be tempting to think that Toshiba’s showdown with its investors is something of an anomaly. Some 63% of the firm’s shareholders are foreign investors and there has been a long-running feud between the management board and shareholders following an accounting scandal in 2015. Certainly, Effissimo’s successful push for an investigation may have been helped by this lingering sense of mistrust.
Nevertheless, the fact that one of the largest conglomerates in Japan could be brought to heel is likely to encourage further activist forays into the Japanese capital markets, leading to additional skirmishes between investors and boardrooms.
Longstanding structural factors also increase the likelihood that Toshiba’s experience will become the rule rather than the exception. Japanese companies’ operational and management style provides a rich opportunity for activist funds seeking to pressure firms to iron out capital inefficiencies. Corporate governance changes and capital market reforms over the past decade have also fed this trend, in particular revisions to rules governing cross-shareholding and requirements for institutional investors to disclose their voting records only further opening the door to activist funds.
Also, whereas recently as a decade ago, activist shareholders’ demands were seen as troublesome or theatrical, their proposals are increasingly viewed as reasonable, and even responsible. Moreover, the growing adoption of ESG principles by companies, as well as a conceptual shift from shareholder to stakeholder-led capitalism, have helped facilitate this shift in perception. As activists have changed, so too has the market’s perception of them. Activist funds have increasingly been recruiting top-level talent from consulting firms and investment banks. In some cases, activists are considered to be among the soundest market actors, increasing corporate and shareholder value.
One indication of how dramatically things have changed is that Murakami Fund, where three founders of Effissimo previously worked, was the target of an official crackdown in the mid-to-late 2000s and accused of behaving like a vulture preying on corporate Japan. Just over 10 years later, their shareholder support speaks for itself.
Despite these shifting perceptions, Japanese business culture remains conservative and the traditional view of activist funds as driven by short-termism and opportunistic profit-making is likely to endure at many firms. This more nuanced landscape only makes the job of board directors more complex and requires a more strategic response than may once have been the case.
With that in mind, boards would be well advised to review their corporate governance structures, identify their vulnerabilities through due diligence on all current and prospective board members in order to identify and obviate any issues of reputational concern, and engage more closely with institutional investors. Further, they should not forget the age-old mantra of ‘know your enemy.’ Companies that are likely to become activist targets should anticipate the kind of challenges they may face by engaging an investigative firm with experience in activist matters to gather intelligence on an activist fund’s investment style, track record, and tactics. A savvy investigator can also monitor relevant developments in real time, such as activist chatter on social media concerning the company. These steps will help companies to better prepare to respond should activist campaigns emerge. Toshiba’s case should not be considered an anomaly but rather a timely warning for any boardroom keen to avoid a similarly public showdown with its shareholders.