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their priority is safe-guarding their
fellow workers’ jobs. This is one
reason why Japan has the reputation
of not being shareholder-friendly.
In many ways, the current system
is outdated. It was made for the
post-war recovery era. Japan has
failed to adapt the system to reflect
its new economic and social reality.
However, it seems that change is now
happening.
One driver is the need to counteract
the effects of an ageing population,
leading to a shrinking workforce.
Management is waking up to the fact
that increasing productivity – rather
than upholding a jobs-for-life culture
– is crucial if Japan’s economy,
and society at large, is to continue
functioning.
Under Prime Minister Shinzo
Abe’s corporate reforms, companies
are being pressured to unwind of
shareholdings in other companies.
The influence is diminishing of
financial institutions that favoured
interest repayment in place of
dividend payment, cash hoarding
ahead of growth investment and
risk aversion over risk taking. Listed
companies must now have at least
two independent directors on their
board and institutional investors
are also required to be more active
stewards of the business. These
FE TRUSTNET
[ BAILLIE GIFFORD ]
14 / 15
measures have introduced greater
challenge to the way managers run
the business. They can no longer rely
on friendly cross-shareholders to
keep them in their post, nor can they
continue to ignore the interests of
other shareholders.
The headlines look promising so
far. Total returns have doubled in the
past four years, through dividend
pay-outs and share buybacks. The
number of independent directors has
risen dramatically, from 50 per cent of
listed companies having none at all to
90 per cent having two or more. And
there are other subtle changes in the
background.
One of the problems with corporate
Japan from an investor’s perspective
is that management’s strategic agenda
is often detached from shareholders’
interests. One way of solving this is by
increasing insider share ownership.
In 2013, before the introduction of
the two governance codes, only four
companies in the TOPIX 500 had any
form of stock-based compensation in
place. This had risen to almost 350 by
2017. Greater inside ownership should
encourage those with executive power
to think more like owners rather than
simply as managers.
The dramatic rise in the number of
independent directors on Japanese
boards in recent years is promising.
However, this is only the start if
board dynamics are to change.
Unless the role of these independent
directors comes with explicit powers
to challenge management and with
well-defined governance duties,
they could fail to have a meaningful
impact on the way business decisions
are made. There is more to be
done, but it is pleasing to see the
proportion of TOPIX 500 companies
with a committee board structure
having increased from 20 per cent to
70 per cent in just two years.
Returning to dividend pay-
out levels, here too we can see
a difference. This is evidenced
by a greater portion of Japanese
companies showing dividend-
related targets in their medium-
term plan. Only 8 per cent of the
top 1,200 companies had an explicit
dividend target in 2004; in 2016, the
figure had risen to 43 per cent. This
suggests that management teams
are finally incorporating shareholder
returns into their capital allocation
decisions.
Many global income hunters
exclude Japan from their strategies,
thinking that its lack of shareholder-
friendly operations impedes the
income Japanese companies can
generate. We disagree. We think that
a reforming Japan presents a unique
proposition to investors.
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