Corporate Japan needs to ditch unnecessary ‘poison pills’
Country’s governance code has had little impact but tough new rules are planned
Investors scouring Japanese stocks ahead of the glut of annual shareholders’ meetings in June face a seasonal teaser: what do the makers of prefab houses, baby pushchairs and woollen yarns have that the makers of baggage handling equipment, meat-based seasonings and lingerie do not?
The answer is takeover defence measures — the “poison pill” mechanisms whose retention by so many Japanese companies has a long tradition of inflaming vocal activist condemnation of management. Even then, the complaints too often make only modest impact on the general shareholder support levels those managements enjoy come the AGMs.
But post-2015 progress on corporate governance has ratcheted the stakes on this issue, and pressure is due to be cranked up yet another notch in 2018 as the Financial Services Agency prepares to toughen the governance code ahead of the AGM season. Institutional investors that have historically waived through poison pills will, under the new conventions, need to account for having voted that way. Japanese managements worried about falling support rates and the rising feistiness of their shareholders can see that the poison pills give even very mild activism an easy line of attack.
Bulls on governance progress point to the fact that, as of last Friday, 20 Japanese companies with market capitalisations over ¥50bn have decided to scrap their takeover defences — a group that includes four of Japan’s largest private railway companies. When companies renewed their poison pills this year, say analysts at Goldman Sachs, they did so with average support rates 5.6 percentage points lower than in 2017.
The same report calculates that companies with a market cap over ¥300bn that have abandoned their takeover defences since January 2013 (a group that includes Panasonic, Yamaha Motor and Shimano) have outperformed the benchmark Topix index by an impressive annual rate of 6 per cent.
Viewed optimistically, all this suggests companies are becoming more conscious that the poison pills are shareholder unfriendly, are more worried about how a more scrutinised roster of investors will vote at that AGMs and have clocked that there is even a valuation upside to improved governance.
But it is too soon to declare a real breakthrough as long as Japanese shareholder registers remain definitions of the word “cosy”. Research by Jefferies strategist Zuhair Khan suggests that, with or without governance code revisions, a third of companies in the Topix 500 have more than 50 per cent of their shares held by “allegiant shareholders” guaranteed to vote with management, and another third have between 33-50 per cent held by that type of investor.
The reality for the great majority of companies is that the poison pill is unnecessary as long as the allegiant shareholders remain in place — those that have ditched the takeover defences have spotted that they can score a free tick in the “improved governance” box and a blip of outperformance without actually laying themselves open to takeover.