Japan is already the world’s second biggest market for shareholder activism. Now, formerly passive investors are getting into the game with 2023 witnessing a record number of proposal filings.

While support levels remain low in most cases, the rise in shareholder engagement has prompted some Japanese companies to explore new kinds of corporate defense plans.

As of July 31, 448 shareholder proposals have been subject to a vote at Japanese companies, up from 344 throughout 2022 and 220 the year before, according to Diligent Market Intelligence (DMI) data.

“We expected the number of the shareholder proposals to increase, but we didn’t expect this much,” Naoko Ueno, vice-president of Asian research at Glass Lewis, told DMI in an interview.

Operational improvements

While some traditional activist demands such as requests for board seats and stock buybacks have declined in number compared to last year’s record levels, proposals seeking incremental changes with an eye to strengthening long-term operational improvements have risen sharply.

As of the end of July, remuneration-related proposals almost doubled in number to 54, compared to 30 throughout 2022. Average support for these proposals also increased to 21.3%, compared to 20.1% a year prior.

“[Proposals have] moved away from financial short-term engineering to [concern] the long-term future of companies,” said Alicia Ogawa, project director for Japanese Corporate Governance and Stewardship, at Columbia Business School.

Asset Value Investors’ (AVI) remuneration-related proposals were especially successful at NC Holdings, where a request to enable shareholders to approve the distribution of surplus capital passed with 69% support, while another proposal demanding directors be compensated in stock awards also passed with 58% support of votes cast.

82 shareholder proposals related to board structure have been subject to a vote at Japan-listed companies in the first seven months of 2023, including requests for the removal of directors and the appointment of more independent directors, up from 58 in all of 2022.

ESG proposals

Board diversity has also made its way onto the agenda. Four diversity-related shareholder proposals were subject to a vote at Japan-listed companies as of July 31, winning 11.8% average support, compared to two winning 10.5% support throughout 2022.

The increase in engagement is largely attributed to the Japanese government’s June announcement that, going forward, companies listed on the top-tier Tokyo Stock Exchange (TSE) Prime Market will be expected to feature a minimum of 30% female representation by 2030.

“While many are skeptical of this target, I believe this is sufficient time,” Tracy Gopal, CEO and founder of Third Arrow Strategies told DMI in an interview. “This target is completely achievable with a change in mindset and dedication to a skills-based nominations process and multi-year board director succession planning.”

Shareholders already appear to be holding companies accountable for board diversity. On March 30, Canon CEO Fujio Mitarai scraped through his reelection with just over 50% support, according to DMI data. Canon has no female directors on its board, although it is preparing to appoint its first woman director next year.

Ueno at Glass Lewis noted that Canon has fewer significant foreign investments on its roster than other major Japanese companies, meaning that primarily Japanese institutional investors were likely responsible for Mitarai’s weak support.

“A lot of Japanese institutional investors now have a female gender diverse policy, and for most of them this is first year to have those policies in place,” she stated.

Climate proposals have also continued to gain traction in Japan, with 15 subject to a vote this year winning 15.3% average support. In all of 2022 and in 2023 to date, one-third of such proposals won above 20% support.

A proposal by Kyoto City asking Kansai Electric to disclose a Paris-aligned medium- to long-term climate plan received 36.4% support at the company’s June 28 annual meeting. Not enough to force change, but certainly enough to influence their decision making, observers noted.

Little support

While the number of proposal filings in Japan is rising, the level of shareholder support remains low in most cases, with only 19 (4.7%) shareholder proposals winning majority support.

According to DMI data, shareholder proposals related to director reelections received 27.8% support on average in the first seven months of 2023, down from 39.2% support in all of 2022 and 53.2% throughout 2021. Capital change proposals similarly experienced a decline in support to 17.9%, down from 19.2% a year earlier and the lowest level recorded since 2018. And while support for proposals related to board structure held relatively steady at 13.5%, versus 14.1% in 2022, it is considerably lower than the near-20% backing recorded in 2021 and 28% a year earlier.

Shiro Hayashi, director of research at Dalton Advisory, conceded that support levels remain low, but hailed the rise in proposals as a sign of increased shareholder engagement.

“Proposals are increasingly becoming engagement tools, which we like, but shareholder support is not very high in most cases, limited to 30% or less,” he told DMI.

Whether or not shareholder proposals are being well received, the rise in engagement has prompted companies to implement novel, and in some cases controversial, shareholder rights plans.

Shortly after activist Yoshiaki Murakami called on Cosmo Energy investors to oust CEO Shigeru Yamada in a bid to shake up the board and improve company profitability, Cosmo Energy shareholders approved a poison pill takeover defense, in a vote that deliberately excluded Murakami group’s 20% stake from the count. Cosmo said that 59.5% of its shareholders supported the poison pill.

This marked only the second so-called majority-of-minority vote on a poison pill in Japan. Such votes prevent specific shareholders from voting, a practice some governance experts say could serve as a new weapon against shareholder activism.

“If Cosmo is able to get away with this issue, other Japanese companies will follow their example,” predicted Ueno.