How to Demolish Japan’s Wall of Yes-Man Allegiant Shareholders

By Nicholas Benes

The short story: it will not be so hard if institutional shareholders really want to topple it, and use the technique suggested here. But first, the background.


This is still the biggest defect of Japan’s equity market, and recent reforms have only made a small dent in it. At the average listed company, between 35% and 50% of the stock is owned by such holders if one includes not only firms in “cross-shareholding” relationships but also firms that unilaterally hold stock in order to win business; most holdings by
banks and insurance companies; and parent companies, subsidiaries, and affiliates. Consistent with this estimate, when Japanese listed companies were asked, “what percent of your shareholders can you count to support management?” in late 2017, fully more than two-thirds of companies responded with numbers in the 30-60% range.

These “policy holdings” by “stable shareholders” represent a massive misallocation of capital that is being put at risk largely for the purpose of protecting executive teams at other companies. In 1967, Japan’s one of Japan’s most venerated managers and the founder of Panasonic, Konosuke Matsushita, minced no words in noting his concern about the then-recent rise of “stable” cross-shareholdings in these words: “If this situation continues, I think it is in no way desirable, because of the risk that once again a maldistribution of capital in our country will occur. I believe that this is not a sign of progress in capitalism; rather, it should be considered as a sign that we are moving backwards.”

Japan’s Productivity Gap – Employment System Re-examined

Japan’s GDP per hours worked only amounts to just above 60 percent of the level in the US. In a rapidly ageing society, such a situation is no longer tenable. When the employment to population ratio declines, productivity needs to increase in order to preserve the level of welfare.

Compared to other nations, Japan’s adult population is highly educated. Investment in research and development is also among the highest and corporations have access to an abundant amount of financial capital. The low level of productivity can therefore not be explained by lack of skills, technology or capital. Rather, the available resources are simply not employed in the best possible way.

The deficiencies are being acknowledged by the Japanese government, which is pushing for a “productivity revolution”. Besides the classic approach of promoting new technologies and the recent support for start-ups also undertaken in other countries, the emphasis is on corporate governance reform, more flexible labour markets and a change in working practices (hataraki-kata kaikaku, 働き方改革).