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Japan Inc faces stormy AGMs in governance shake-up

Sony
Noriyuki Aida | Bloomberg | Getty Images

Japan's normally sleepy shareholder meetings are set for a shake-up this year as a new corporate governance code encourages disgruntled investors to speak out and forces companies to take demands for better returns more seriously.

Combined with a separate "stewardship" code, which holds fund managers accountable for how they vote, the new rules mean CEOs of poor market performers like electronics maker Sharp may face unusually strong dissent in the proxy season starting on Tuesday.

"The weight of any opposition vote is now heavier," said Nomura Securities analyst Kengo Nishiyama, who specialises in corporate governance issues.

The governance code which took effect this month requires listed firms to appoint multiple outside directors and calls for shareholder engagement, addressing longstanding criticism that Japan's firms neglected investors.

It also says companies must consider the views of shareholders who oppose management-backed proposals but are out-voted. While the guidelines are not legally binding, the Tokyo bourse requires listed companies to "comply or explain".

Sharp criticism

Sharp CEO Kozo Takahashi will come under particularly strong pressure at the company's June 23 meeting, after weak sales of smartphone displays and TVs forced it to seek a second major bailout from its creditors.

Takahashi won 97 percent support for election last year, so a significant drop could raise doubts over his leadership.

Toshiba, generally considered a well-run conglomerate, is also in hot water as a probe of past accounting irregularities has kept it from closing its books for the year through March and forced it to suspend a year-end dividend.

To appease investors, sources have told Reuters, Toshiba is considering a special dividend later.

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"Individuals and institutions will be pointing to the code, and it will put more pressure on management to have good answers to criticism," said Nicholas Benes, an early proponent of the code who heads the Board Director Training Institute of Japan.

Even Sony, which has doubled its share price in the past year thanks to restructuring and strong sales of sensors, is set for a challenge with criticism from former executives pining for the company's glory days.

Proxy advisory firm ISS is also recommending against re-electing CEO Kazuo Hirai as well as Sharp's Takahashi, citing low return on equity (ROE).

Profits no protection

Even Toyota Motor, after another year of record profits, is facing a battle over its proposals for a new class of shares.

Proxy advisory firms are giving conflicting recommendations, with Glass, Lewis & Co saying the "Model AA" share plan will give Toyota more flexibility and ISS saying it would erode fiscal discipline.

The California State Teachers' Retirement System (CalSTRS), the second-largest U.S. public pension fund, says it will vote against the proposal at Toyota's AGM.

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Despite the expected rise in dissent, however, investors in Japan are also enjoying the highest returns in years thanks to rising share prices and a drive to boost shareholder returns.

In addition to hiring outside directors to meet the code's guidelines, companies have also been rushing to buy back shares, hike dividends and boost ROE. Tokyo-listed firms will pay shareholders a record of around 14.6 trillion yen, or $110 billion, this year, Nomura's Nishiyama reckons.

Even industrial robot maker Fanuc, long known for its cash-hoarding habits and cool treatment of shareholders as much as for its earnings power, is doubling its dividend payout ratio after pressure from activist investor Daniel Loeb.

But the CEO of BlackRock, the world's biggest asset manager, is urging Japanese companies to think long-term.

Companies must "resist the pressure of short-term shareholders to extract value from the company if it would compromise value creation for long-term owners," Larry Fink wrote to in a recent letter seen by Reuters.