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Corporate Governance Reforms in Q2FY24 in Japan

by Anuja Agarwal, Research Head, Japan and India

22 November 2024

Japan’s corporate governance journey is evolving with incremental progress in corporate announcements over the reporting season. It is encouraging to see companies increasingly focus on unlocking shareholder value through reforms. This earnings season (Q2 FY24), we tracked progress in corporate governance themes like cross-shareholding unwinds and ROE targets, parent-child subsidiary consolidation, increasing management buyouts (MBOs) and ultimately improvements in capital efficiency. Some notable observations:

1. NEC’s decision to take its subsidiary NEC Networks & System Integration Corp (NSEIC) private is a concrete example of parent-child consolidation.

2. Kyocera announced it plans to sell 1/3 of its KDDI holdings over 5 years and will consider reductions, thereafter, significant progress on reducing its cross-shareholding. The Kyoto-based maker of telecom equipment and semiconductor materials holds 15.3% of KDDI — a stake now worth roughly ¥1.6 trillion ($10.4 billion), according to data compiled by Bloomberg.

3. Toyota Industries announced it will sell its entire stake in Denso (185mn shares, $2.7b) from Dec 2024 to March 2027 - progress in its crossholding unwind targets.

4. Kyoto Financial Group set a new strategic target for ROE to 5% from 3% previously to be achieved by March 2029 and stated it aims to reduce strategic equity holding by 100 billion yen to invest in venture capital.

5. This new wave of reforms is creating a more conducive environment for mergers and acquisitions (M&A) activity. Japan's three megabanks raised their annual profit forecasts to all-time highs: one of the key driving forces for profit growth was an increase in M&A activity such as and management buyouts (MBOs).

6. Institutional Shareholder Services (ISS) published its proposals for changes to its benchmark proxy voting policies to come into force in February 2025. One policy update is proposed for Japan to include director tenure, specifically a maximum 12-year tenure, as part of the considerations when establishing the independence classification of a director.

The tangible benefits of corporate governance reform is through company practices. Tokyo Stock Exchange (TSE) published these examples of disclosures brought to them by investors as a way to prod corporates towards higher quality disclosures.

Japanese companies can boost future earnings as well as “Kasegu chikara” by unlocking capital efficiency through corporate governance reforms in line with Tokyo Stock Exchange’s vision for corporate Japan and encourage greater shareholder engagement as articulated in the Action Program.

About the Author(s)


Anuja Agarwal
Research Head, Japan and India, ACGA

Anuja Agarwal has joined ACGA to help in Advocacy and Research for Japan  and India. Anuja finished her MBA from IIMA in 2004 and joined BoFA in Hong Kong. She worked successfully on sell side as a derivatives prop trader and made markets for vanilla and exotic derivatives. She had a break from Wall Street with three young kids and ran a small startup on financial literacy where she was featured on Forbes, SCMP, Radio HK. Since 2016 she joined a multimanager quant fund and since then has worked in senior buyside roles at funds. She is passionate about integrating ESG strategies with fundamental views and has experience in PRI Disclosures, Stewardship and Proxy voting. She has been a mentor for Amber Foundation, 100WF and a Board advisory for a reusable cutlery company Recube.hk. She is a ESG CFA certificate holder and a Talent4Impact Fellow. She is a fitness freak and has completed Greenpower (50k), Moon trekker (42k), UNICEF (20k) races.

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