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In Japan, shareholder activism has been gaining recognition these days, 10 years after the introduction of the Japan Stewardship Code, which encourages engagement/dialogue between company management and investors. The recent rise in activism seems to contribute to corporate reform and changes in management behavior to improve shareholders’ value. In this article (and the two that will follow), we examine the historical evolution of activism in Japan to discuss “why now?” and to assess its implications for stock markets and investors.
Globally, but particularly in the US and Europe, activism has a long history that began as a battle between company management teams and owners/shareholders regarding distribution of profits. The concept of activism emerged when the separation of management and ownership progressed as stock markets expanded to raise capital not only from owners but also from public investors.
Comparatively, Japan has experienced a unique path toward activism because of its cross-held share structure, main-bank-led capitalism, groupthink mentality both in companies and investors, etc. Before the term “activist” was introduced, the concept conjured up negative images such as “vultures” and corporate raiders. There were even examples of antisocial group blackmailing and extortion attempts against companies that demonstrated what we now think of as activist behavior, citing scandal evidence.
To protect from those ”vultures,” as well as foreign capital intruders, companies and main banks that provided financial capital to companies formed cross-held share systems called mochiai in the 1960s through the 80s. Under this mochiai system, main banks and stakeholders (also known as keiretsu, or group conglomerates) controlled governance with almost no room for activists to come into play. The strength of this system was such that, in 1990, when US corporate raider T. Boone Pickens bought meaningful shares of Toyota-group auto-parts manufacture, Koito Manufacturing, he lost against Toyota group stakeholders and their main bank groups. In the period following World War II, Japan’s economy was an unbreakable fortress of closed capitalism — on one hand, this insulated the country from foreign capital intruders, but on another, it prevented healthy activism from penetrating.
However, in the 1990s, several financial crises burst the economic bubble in Japan, unwinding the mochiai system and triggering changes in the ownership structure of the Japanese stock market (Figure 1).
The first wave of activism came to Japan in the early 2000s, lasting until the global financial crisis (GFC) in 2008. During this time, the Murakami Fund, led by investor Yoshiaki Murakami, acquired a large amount of Nippon Broadcasting System, Hanshin Electric Railway, and TBS, among other companies. In addition, Steel Partners Japan, a US investment fund, made hostile takeovers of Bull-Dog Sauce and Aderans.
The concept of activism was new, revolutionary, and unique compared to Japan’s traditional, closed-off capitalism, but it didn’t gain support from other shareholders, stakeholders, society, or the market. Simply, the first wave of activists tried to benefit from short-term profits without fully understanding the business model of targeted companies.
The battle between Steel Partners and Bull-Dog Sauce ended in 2007, when the Supreme Court of Japan decided to protect Bull-Dog Sauce’s management from activists’ abuse of shareholder rights. This, paired with the fact that Murakami was found guilty of insider trading, helped ensure that the first wave of activism in Japan gradually waned and lost influence.
Government initiatives served as the impetus for Japan’s second wave of activism. Following the GFC and in response to sticky deflation during the early 2010s, then-Prime Minister Shinzō Abe introduced economic policies known as Abenomics. These policies were characterized by three “arrows” of reform — monetary, fiscal, and growth.
As part of growth reform, the Japan Stewardship Code was introduced in 2014, followed by the Corporate Governance Code in 2015. This pair of so-called “double codes” encouraged institutional investors to perform fiduciary duties and motivated companies to improve their governance to sustain longer-term growth. The double codes set the stage for bilateral engagements and dialogues between investors and companies. These dual reforms also brought in US activists with long-term horizons, such as ValueAct and Pershing Square, as well as local activists, to enhance shareholder value.
Unlike during the first wave of activism in Japan, activists these days are not necessarily at odds with company management. Instead, today, company management intentionally uses the activists’ external pressure to break up hard, stubborn, internal opposition parties resistant to reform. The relationship today could be likened to “Black Ships” (in Japanese kurofune), calling to mind the Western vessels that arrived in Japan in 1853, ending its period of isolation and causing a shift in government, ending the Edo Era and beginning the Meiji Era. Today, activists both foreign and domestic within Japan often work together with company management to implement bold management reforms, such as divestitures of unprofitable business.
Fast forward to 2023. There’s been another government push for the Tokyo Stock Exchange to put pressure on listed companies with poor price-to-book ratios, waking up the sleepy, low-quality, low-profit companies, for reforms. Together with governmental pressures, activists, once dubbed “vultures,” now have the room to act as “saviors” of management reforms among Japanese companies.
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Toshiki Izumi, CFA, CMA