If anyone thought that 2,104 Japanese companies holding their shareholder meetings on the same day would lead to a few juicy reports of managements being held to account by irate shareholders, they had better think again. That’s not the way things go in corporate Japan, even with a falling stock market.
Probably the biggest disturbance on June 29 was to the holiday plans of the Japanese police force. More than 10,000 officers were put on alert to protect companies against the notorious sokaiya – minor shareholders, often linked to criminal syndicates, who attempt to extort money by threatening to embarrass boards at public meetings. Although the activities of the sokaiya have declined in recent years, most companies hold their meetings at the same time in a bid to make it difficult for the criminally minded to hit too many targets. As a back-up, it remains common for managements to enlist the aid of a devout band of employees to show strong support for company policy at AGMs.
Unfortunately, those policies also make it nigh on impossible for normal shareholders to openly voice their disapproval of corporate strategies. That is, of course, assuming they are motivated to do so. Shareholders in Japanese companies have traditionally been referred to as the silent majority. They have been happy to let managements run the companies as they see fit and confident that, should a problem arise, they can always sell at a handsome profit. Likewise, companies have paid little attention to share prices which kept on rising without any significant communications efforts.
That was all fine and dandy when things were going well, but with Japan hit by recession and a collapsing market over the past few years many shareholders have had their fingers burned. Some have even begun to question whether, as owners, they should be happy with the state of affairs where the interests of the management, the ‘company’, employees and the community come first and foremost. To extend this to actually punishing managements for poor returns by voting against them is still a long way off in most cases.
Kuniko Okuwaki of Dewe Rogerson in Tokyo argues that corporate executives are obviously concerned about their share price, but the nature and order of their responsibilities differ from western managements’. This is compounded by the strong relationships between companies and their securities houses – with the latter looking after capital market concerns. ‘It’s often said that companies should focus on their business while the securities houses think about the share price,’ says Okuwaki. Focusing on shareholder value is a rare management goal.
Large cross-shareholdings also remain common, with long-developed equity links between companies and banks. Most Japanese corporations have had a safe shareholding base of this nature for many years, so there is little incentive to jump to attention if other investors get fidgety.
Things are changing, though. But slowly. During the recession some companies and banks have begun to unwind their cross-holdings, seeing little point in maintaining interests in stocks which offer no chance of capital gains and no income cushion in hard times. Companies have consequently turned to overseas investors to take up some of the equity slack, leading to a slightly improved understanding of investor relations in the corporate community.
‘Cross-holding among conglomerates is winding down, putting more shares in the open market,’ says Kirk Patterson, former president of Gavin Anderson Japan and pioneer of the IR business in the country. ‘The result is a rising awareness among Japanese companies of the need to communicate with shareholders. Moreover, in the past Japan was awash with capital, now it’s scarce, hence more competition.’
Although many companies have established IR departments, there are few with personnel solely dedicated to the function. Those that do tend to be the companies with ADR programmes such as Sony and Toyota. For the most part the bulk of IR activities are handled by the investor relations arms of the big securities houses: Daiwa, Nikko, Nomura and Yamaichi.
Tokura Hiroshi, deputy general manager at Nomura Investor Relations Co, says many companies believe that group presentations after results will suffice as the sum of their IR programmes. Hiroshi and his colleagues have been encouraging their clients towards one-on-ones with investors and analysts but these remain rare as a means of communicating with the financial community. Roadshows are the most common method of getting the message across to institutional investors – both domestically and overseas – with the schedules and organisation being left up to the securities houses.
Nomura also organises regional broker presentations for the retail market and publishes its own investor relations newsletter which is largely distributed via its branches. In the land which led the world’s electronic revolution for many years, it’s hardly surprising that the Internet has been used in the IR market. Nomura launched its site earlier this year, providing details of its IR services as well as information about client companies (https://www.infojapan.com/infobiz/IR-info/).
Cosy relationships between companies and their lead brokers on the investor relations front seem to have worked well during a buoyant market. But as the competition for capital has intensified so the possibility of conflicts of interest have arisen. ‘As a large part of the IR activities of Japanese companies are carried out by subsidiaries of securities houses, investor relations is affected by the interests of brokers,’ says Mikio Sujino, founder of Venture Search Technology and a former electronics analyst at Nikko Securities. ‘The problem is that those interests are focused around how to distribute shares. With the investor relations activity closely linked to the sales operations, conflicts between the two areas sometimes arise.’
This conflict of interest may explain why some companies are beginning to turn to independent consultants to help focus their investor relations programmes. According to Yumi Asahara of Technimetrics in New York, more Japanese companies are seeking to target institutional investors prior to roadshows rather than simply visiting overseas centres and inviting everyone along to presentations who might harbour some interest in the stock.
It’s not just the Sonys of this world which are looking overseas for potential investors either. There are an increasing number of small-cap listed and OTC companies which launch international roadshows each year. Hideki Shigenobu, vice president at Oppenheimer Capital in New York, says that although it used to be just the hi-tech companies which made the annual pilgrimage to the States to present results to the financial community, that has changed in the last two to three years. There is now a bunch of small-cap companies which regularly beat their way to the Big Apple. They are often companies with no international interests, listed on minor exchanges in Japan or traded OTC. All share the same desire to widen their shareholder base in the face of a declining domestic market – often as a means of fulfilling criteria to move up to an official listing. ‘Sometimes you have to question why they are here in the first place,’ says Shigenobu.
Donald Gilfillan, an investment manager at Dunedin Fund Managers in Edinburgh, agrees that more Japanese companies have been hitting the international trail in the past few years, especially in the run-up to public offerings. He says that most companies favour group presentations, although there is a growing appreciation that one-on-ones are a better way of getting the message across. ‘Many companies effectively read through their most recent report at presentations which to some extent defeats the object of travelling 6,000 miles to come and see us, ‘ says Gilfillan. ‘Because of the language barrier there’s a tendency to read from prepared and simple scripts which are frequently high on data but don’t get to the crux of the issue.’
Teleconferences are rarely used as a substitute because of the language barrier. However, Gilfillan points out it would be wrong to categorise all Japanese companies in the same mould as some are very good at communicating their message and visit Edinburgh annually. ‘On the other hand, there are those companies which are very difficult to get a meeting with even when you visit Japan.’
Dennis Clough, a fund manager at Schroder Investment Management in London, believes that the best information comes from one-on-one visits to companies when he is in Japan or by his colleagues in Tokyo. Clough says that when most Japanese companies visit London on roadshows they have their own agenda which they want to run through. But when Schroders visits them in Japan, ‘We’re going with our own set of questions which they have to respond to.’
It’s common for roadshow presentations to be handled by senior management but one-on-ones tend to be with spokespersons slightly lower down the rankings, such as the treasurer. That’s not necessarily a bad thing though, according to a number of analysts and fund managers. Depending on the size of the company, the lower ranking spokesperson often has a better handle on the way the firm is being run.
Much of the growth of IR activities in Japan can be attributed to learning the function as a foreign activity for foreign audiences and then applying it to the domestic market. Similarly, James Weeks, president of Gavin Anderson Japan, notes that the origin of IR activities in Japan came with the introduction of western-style IR techniques by foreign companies seeking access to Japanese capital in the 1980s. Since then, he says, Japanese companies have adopted certain elements of western-style practice, partly to meet the needs of overseas investors and partly because of greater pressure to explain themselves to increasingly demanding investors at home.
‘The role of investor relations is now much better understood than it was five or ten years ago,’ says Weeks. ‘Some elements of western-style practice have been adopted. For example, a number of Japanese companies are experimenting domestically with better disclosure documents. But it’s still tentative and it’s selective rather than wholesale adoption. And that’s the way it can be expected to remain.’
Another Tokyo-based IR consultant says that, if anything, the onset of the slump could have led to a loss of momentum in the rise of the IR function due to a cutting of budgets. The Japanese Investor Relations Association (Jira), is actively combating any slowdown, though, with a programme of discussion groups and information for its 150 plus members.
Foreign pressure continues to push the agenda forward, however. Corporate governance has still not made its mark in Japan but it’s gaining momentum. Calpers has targeted a number of under-performing Japanese companies this year, including casting a proxy vote opposing the election of Setsuya Tabuchi and Yoshihisa Tabuchi to the board of Nomura Securities Co. Both were former presidents who resigned in 1991 in connection with a scandal over compensation payments to favoured clients. CalPERS said it opposed the proposal as a matter of principle. Fairly predictably, however, management won the day at the shareholder meeting on June 29 – which lasted just 50 minutes.
Domestic investors are joining the fray, too. Fuji Stock Investment Research Co proposed stock buy-backs at Okumura Corporation and Tsuken Corporation. Both proposals were defeated in meetings lasting 26 minutes and two hours, respectively. Stock buy-backs are firmly on the corporate governance agenda as a means of raising shareholder value in difficult times. But it’s a long, slow haul. As Shigenobu at Oppenheimer points out, there is a dilemma for fund managers who want to make themselves heard at management level. ‘If you have the guts to speak up and tell them what to do, then you won’t get a second chance to visit the company. They have a different type of priority and shareholders are not that priority in most cases. You have tough choices to make: do you want to change the firm or do you want to back off from that investment?’
There are fears that things could also turn full circle. Signs of a recovery are on the horizon: as the yen loses some of its value and volumes begin to pick up on the stock market, some may opt to take up cross-holdings again and return to the safe, non-communicating ways of old. Yumi Asahara thinks there has been too much progress made for that to happen, though. ‘Bad news or no news, like it or not, a lot of Japanese companies realise they have to communicate with their shareholders.’
