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E-MailKazunori Suzuki is Professor of Finance at Waseda Business School. This post is based on a recent paper by Professor Suzuki; Marco Becht, Professor of Finance at Université Libre de Bruxelles; Julian Franks, Professor of Finance at London Business School; and Hideaki Miyajima, Professor of Commerce at Waseda Business School.
The Japanese stock market is large and most companies are widely held. The fraction of foreign ownership has been rising steadily and Japanese institutional investors are increasingly committed to active ownership. There have been a number of high profile hedge fund activist campaigns at internationally well-known companies like Sony and, most recently Toshiba. Yet, research on international hedge fund activism has shown that activist campaigns have been comparatively unsuccessful in Japan, including at Sony. The giant Government Pension Investment Fund (GPIF) was instrumental in setting up the Global Asset Owners’ Forum that engages on Environmental, Social and Governance (ESG) internationally, yet it is unclear how much progress has been made in GPIF’s home country. ESG engagement is often conducted in private and is therefore unobservable.
The research paper provides evidence that active ownership in Japan can be successful when conducted in private. It relies on data from the Japan Engagement Consortium (JEC), a stewardship service provided by Governance for Owners Japan (GOJ) serving Japanese and international clients. Its purpose is to engage companies on behalf of the JEC members. The decision to engage with a particular company is taken by GOJ but after consultation with consortium members. To be selected for engagement at least one consortium member must hold shares in the target. An agenda is agreed after preliminary meetings have taken place with the prospective target company. The service heavily relies on personal meetings, reputation, and discretion. There is an explicit understanding that contacts with the target companies are kept private, even if the target company rejects the invitation to engage.
JEC has been very successful in achieving its objectives. We find that in more than three-quarter of cases (32 out of 39) GOJ obtained at least one of the desired outcomes. The success rate was also high in terms of the number of agenda items; GOJ considers that 70% of 156 items were resolved satisfactorily. We could independently link 80 items or 51% to a publicly observable outcome announcement; the associated announcement returns were significantly positive, and the cumulative abnormal returns for an 11-day window were 2.6 percent on average.
The evidence suggests that active ownership can be successful in Japan. GOJ’s engagement style seems successful across a broad range of companies and a broad range of engagement items. However, GOJ’s ability to achieve outcomes cannot be extrapolated to the whole market. GOJ chooses its engagement with the expectation of being able to achieve an outcome, so its success is endogenous. We do not know how successfully quiet activism would have been if we had been able to choose GOJ’s engagement targets from the universe of companies. Nevertheless, the evidence suggests that quiet activism is potentially conducive to bringing about the type of change set out in the Japanese corporate governance and stewardship codes. Quiet activism has the advantage that it is more in keeping with Japan’s traditional approach to corporate governance.
Nevertheless, private activism is no substitute for public hedge fund activism. Hedge fund activists often pursue restructuring, mergers, takeovers or larger pay-outs. The chance of success is smaller than for private activism, but then the agenda of the hedge funds is more aggressive than that of GOJ. For example, GOJ does not pursue mergers or going private, transactions that are particularly profitable. As a result, we find that when hedge fund activists succeed the outcome returns are large, and greater than those achieved by GOJ. If Japan requires more restructuring and the rewards for bringing about successful takeover outcomes are sufficiently large, then public activism in Japan is likely to persist.
Existing institutions matter. In the United States and the United Kingdom, activism has made widely held companies much more focused on shareholder value. In these countries, the current emphasis is on making companies more accountable to responsible investors and employees. Japan has only recently begun to move from its traditional insider-oriented governance model which stresses a stakeholder business model, to one which places more emphasis on outside shareholders. The success of quiet engagement documented in this paper is encouraging and suggests that quiet activism may have an important role to play in corporate Japan. The question arises whether this is a Japanese phenomenon, or one that is worth exporting to other countries.
The complete paper is available for download here.
