Japanese companies are copycats,’ says Yumi Asahara, managing director at Technimetrics in New York. ‘If one is doing something then more will follow.’
Asahara’s seen it all before. She’s been in Japanese investor relations for some nine years now and in that time has seen a radical change in how the function is perceived in Japan. For the first six years she says it was as good as dormant. No-one was interested. Three years ago, as foreign investors moved into Japan in force, executives started taking notice. Now, with financial institutions under pressure to reform or collapse, the cozy cross-shareholdings of the past are slowly being unwound. Suddenly, everyone’s interested in IR.
That trend is confirmed by Yoshiko Sato, program director at the Japanese Investor Relations Association (Jira). She reports a near 10 percent increase in the number of member companies since last summer. Newspaper reports that the collapse of Yamaichi Securities might have been prevented with better disclosure have got some executives running for their IR checkbooks.
But in most cases, this isn’t IR western-style. Many Tokyo-based IR agencies are happy to attest to that. ‘The Japanese often want to follow a western model,’ continues Asahara, ‘it just takes many years for them to implement. They’ll research it for a long period of time and then do it step by step.’ Still, the IR ball has certainly gained some momentum, although in many cases it remains more talk than action.
Hot gossip
The latest IR talk of the town in Tokyo is focusing on stock repurchases and stock option incentive schemes. Legislative changes made in May last year on both these fronts are slowly being absorbed by Japanese companies and, although relatively few companies have taken full advantage of the new legislation as yet, there’s certainly a lot of noise on the subject.
As for stock buy-backs, last May’s changes to the Commercial Code moved on a process which began in 1993. For some years various parties, within Japan and outside, have been pushing for stock buy-backs at Japanese companies but prohibitive tax treatment and the need to gain shareholder approval for a specified repurchase period have prevented them.
‘Japanese companies issued a lot of shares, convertible bonds and equity warrants during the bubble period which diluted existing shares,’ explains Dr Mitsuhiro Fukao, business professor at Keio University, Tokyo. ‘After the bubble burst some companies had issued too many shares and no longer needed so much outstanding capital.’
But change has been a long, slow process. A three-year tax moratorium starting in the fall of 1995 made the situation more appealing and last May’s changes eased the rules even further to allow companies to buy back up to 10 percent of shares outstanding. Many companies have since talked up the possibility of repurchases. But those putting decent-sized plans into action remain few and far between.
John Taylor, manager of project development at the Washington, DC-based Investor Responsibility Research Center, reports an increase in the number of companies with repurchase plans on their agendas in 1997. ‘And compared to last year I would expect to see a lot more share repurchase plans this year,’ he adds, although he warns that it will probably be several years before the new rules really have an effect. His colleague, Yasu Izumikawa, believes that any increase has been fairly random; and that despite companies seeking approval to repurchase up to 10 percent, no company has gone near that level. ‘There’s a learning curve to climb before companies can really do this,’ concludes Izumikawa.
Pressure sources
Of late, much of the pressure for buy-backs has come from the big life insurers in Japan. In a recent IRRC report Taylor wrote: ‘The head of investments at Japan’s second largest life insurer, Dai-Ichi Life, which controls more than 1 percent of the Japanese equity market, reported to IRRC in June 1997 that he hopes US institutions will push Japanese companies to launch share repurchases.’
Taylor believes that the life insurers are unwilling to stick their neck out on the issue because their shareholdings often grant them access to the staff of the companies in which they are invested in order to sell them insurance products. They’d much rather someone like Calpers took the lead. ‘Calpers has less to lose,’ he adds.
Without more direct pressure on the issue it seems that many Japanese companies will remain happy to talk the talk of share buy-backs without having to walk the walk. Hiroshi Tokura, deputy general manager at Nomura Investor Relations, confirms that many large cap companies are raising the issue of buy-backs with the sole purpose of increasing their market value. Indeed, Asahara at Technimetrics remains skeptical that any companies will move toward buy-backs if it becomes apparent that their implementation won’t automatically lead to an increase in the share price.
Academics believe more of a move toward buying back stock will only happen once the unwinding of cross-shareholdings moves up a gear. ‘Then the shareholders will begin to shift from cozy cross-shareholdings to foreign institutions who want higher returns,’ says Fukao. ‘And there will definitely be increasing pressure from foreign institutions on this issue.’
The introduction of stock options has followed a similar pattern since last year’s Commercial Code revision. Many companies want to talk about them but fewer are acting.
Sony Corporation led the way in this area with a warrant-based management incentive plan in 1995 – way before last year’s reforms were even on the table. At the time the quasi-stock option plan covered the then 36 directors. This was increased a year later to include senior executive staff members. Then last year, when Sony slashed its directors to just ten, it expanded the warrant-based plan to encompass corporate executive officers and group company directors. Today, following further revisions in February, the plan applies to 200 senior Sony personnel. Some 35 other companies have adopted similar warrant-based plans.
‘At present, we will not be taking advantage of the new regulations,’ says a Sony spokesman when asked whether they would again lead the way with an equity-based incentive scheme. For Sony, there remain too many restrictions and taxation questions.
Small but keen
In fact, on the stock option front, it’s the smaller, OTC-traded companies that have really taken advantage of the new regulations. Hiroyuki Sugitachi, manager of business development at Nomura Securities, says 67 companies have introduced stock option schemes since August.
Mitsuhiro Fukao confirms that smaller, high-tech firms are anxious to incentivize their employees by offering greater performance-related rewards. Only a few large caps – Toyota among them – have made any moves in this area.
Certainly, many observers believe that, as with buy-backs, stock option schemes may take off once a few larger companies have tested the water, overcome the taxation problems and proved the schemes’ appeal to both domestic and foreign institutional shareholders.
In the meantime, Asahara reports that another hot topic is how to encourage foreign shareholders to return their proxy cards. At the moment, the proxy system remains complicated for foreign institutions despite the efforts of the likes of IRRC, Global Proxy Services and ISS to ease the situation. Most companies continuing to hold their meetings on the same day in June doesn’t help matters either. Indeed, Taylor and Izumikawa jokingly say that they hope not too many companies want to introduce repurchase plans and stock options in one go this year because they will have so many variables to analyze all at once.
For the time being, at least, there is little danger of Taylor and Izumikawa being put to the test in June on the repurchase and option front. A lot of talk and a great deal of caution remain the general rule. Asahara warns of a testing future, though, with foreign shareholdings creeping up and no satisfactory system for cross-border solicitation out of Japan. If those companies with very high foreign shareholdings need to pass a two-thirds vote they could be in trouble. That’s when you’ll see the pressure from foreign institutions mount. And that’s when there could be more action and less talk on wider corporate governance issues.
