Japan’s Tentative First Steps Toward Empowering Investors

May 4, 2016

Three reports in recent weeks suggest that, while the calcification of Japan’s economic system may finally be cracking under the steady pressure of Abenomics, the country still has work to do before opening its corporate sector to the accountability mechanisms accepted as a given in other developed economies.

First, the Government Pension Investment Fund (GPIF), the world’s largest retirement system at US$1.1 trillion, will increasingly use its heft as a shareowner of Japanese companies to help spur the economy and to push its corporate sector out of its decades of languor. Last year the fund set about to change its asset allocation, doubling its equities exposure from 25% to 50% and increasing its exposure to foreign securities to 40%. The fund accepted Japan’s Stewardship Code for investors in May 2014 and signed onto the Principles for Responsible Investment in September 2015.

In January 2016, the government announced that it was preparing legislation to allow GPIF to invest directly in Japanese stocks; the fund currently invests in Japanese equities through outside managers. However, this initiative was shelved one month later, until at least 2019, due to lobbying by Japan’s business lobby, the Keidanren, over concerns about political interference in corporate decision-making.1 Most recently, the fund formed a “Stewardship Enhancement Group” in March 2016, whose purpose is to

discuss appropriate stewardship responsibilities of GPIF and specific action plans from a long-term strategic perspective, analyze ESG factors in domestic and international equities, and promote collaboration between equity owners and businesses.

. . . We believe that it is appropriate and essential for GPIF as a pension fund to increase long-term investment returns for pension beneficiaries by fostering sustainable growth and worth of companies in which GPIF invests.2

The second report is the remarkable success of a foreign activist investor, Daniel Loeb’s Third Point, in pushing out the 83-year-old chairman and CEO of the 7-Eleven empire, Toshifumi Suzuki, who had led the conglomerate for a quarter century. Following successes at agitating for change at Japanese companies Sony Corp. and Fanuc Corp., Mr. Loeb is seeking to have the parent company Seven & i Holdings focus on the global 7-Eleven convenience store business and away from other, money-losing retail operations. His choice to head the enterprise, Ryuichi Isaka, was chosen on April 15, 2016 by the company’s nominating committee to be the new president of Seven & i Holdings. The Wall Street Journal heralded the event as “a milestone for the budding activist-shareholder movement in Japan and a potential harbinger for Japanese executives who had until recently been sheltered from agitating investors.”3

While such events remain rare in Japan, we can expect increasing pressure from activists following the adoption of a corporate governance code in 2015 requiring more outside directors on company boards, traditionally dominated by executives. Mr. Loeb’s success, along with the presence of other activist funds such as Effissimo Capital Management, Children’s Investment Fund, and TMAM-GO Japan Engagement Fund, will doubtless spur yet more engagement strategies in the market.

Finally, Japan has recognized that its legal system is in dire need of more litigation and more lawyers. However, since a government initiative was launched 15 years ago to more than double the number of legal professionals, Japan is well short of the mark. Notwithstanding increasing the number of private lawyers from 17,000 in 2000 to 37,000 now, “Japan has far fewer lawyers per capita than the U.S. and major European nations,” according to The Wall Street Journal. The comparative numbers versus the U.S. are stark: as of 2015, Japan had just 29 lawyers per 100,000 people, while the U.S. had 377.4

A homogeneous culture, a preference for informal dispute resolution and a graying population (“Old people are not very litigious,” says one struggling lawyer) all contribute to a weak litigation environment. Furthermore, fewer of the best and brightest are seeking careers in law, and “Japan doesn’t have contingency fees and hasn’t had a mechanism for class-action suits, although one is set to be introduced this year.... What’s more, there are high hurdles to bringing a successful case. Japanese law doesn’t include the concept of discovery…so it is more difficult for people suing a corporation to find incriminating evidence.5

Over coming years, we will see whether more muscular shareowner engagement in Japan’s corporations will be successful without an effective system of legal redress as a backstop.

1  http://www.ft.com/cms/s/0/3b29235e-d55d-11e5-829b-8564e7528e54.html
2  http://www.gpif.go.jp/en/topics/pdf/20160323_establishment_of_stewardship_
3  Megumi Fujikawa & Kosaku Narioka, 7-Eleven Chief Quits Amid Activist Pressure, The Wall Street Journal, April 8, 2016.
4  Mitsuru Obe, Japan’s Lawyers Lament: Not Enough Litigation, The Wall Street Journal, April 4, 2016.
5  Ibid.

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