…BUT THIS VOTING SEASON has turned into a big disappointment. Despite ISS’ shareholder-rights campaign, the presidents of Japan’s top 200 companies received median voting support of 96.6%—a 0.5 percentage point rise from 2014. Even the president of Toshiba (6502.Japan), which lost a third of its market value from an accounting scandal and write-downs, got a 94% approval rating. Some 76% and 91% of investors voted against dividend hikes and share buybacks, respectively.
Exasperated foreign investors might wonder why Japanese investors fail to remedy mediocre performance. The biggest problem is that about 45% of Japanese companies hold their annual meeting on the same day, notes CLSA’s Japan strategist Nicholas Smith. It’s hard for institutional investors to grasp issues if they appear simultaneously, so they vote with management. Smith describes annual meetings as “a nightmare for everyone.”
A substantial portion of Japan Inc. is held by domestic financial institutions that don’t want to rock the boat, not even penalizing companies in open-market operations. They own 27% of all the corporate shares but average only 4% of the trading volume; foreigners, by comparison, own just over 30% of the shares but trade as much as 65% by volume. Domestic institutions—banks, brokers, and insurance companies—act more like market makers than investors, “almost as if their investment boards only met twice a year,” says Smith.
Japan’s banks suffer by operating as passive investors. Bank of Kyoto (8369.Japan) owns stocks worth almost 130% of its own market capitalization, and its ROE is just 3.7%. Shiga Bank (8366.Japan), Hyakugo Bank (8368.Japan), and Keisei Electric Railway (9009.Japan) suffer from similar woes.
It is encouraging that the government now wants Japan Inc. to disclose governance measures for the first time. However, companies can wait until the end of 2015 to disclose governance codes, thus missing the annual-meeting season in early summer. But give Japan some slack. “Year one was always going to be a slow start to any corporate-governance revolution,” says Smith. …..