Investor sentiment is deteriorating due to fears of an economic downturn caused by interest rate hikes in Europe and the United States. With the yen falling against stocks, which is the mainstay of the market, and investors unable to find anything to buy, investors are turning to shareholder-proposed issues. The focus of attention is on companies that have not only proposed, but subsequently withdrawn their shareholder proposals. Investors are hoping for a change in attitude toward shareholders.

“I was making up for the losses in Japanese stocks with U.S. stocks,” bemoaned a man in his 40s, a retail investor living in Kanagawa Prefecture. The Dow Jones Industrial Average fell for 5 consecutive days to its lowest level since the beginning of the year, and his unrealized gains suddenly turned into unrealized losses. The weak yen, which is supposed to be a tailwind for Japanese companies, has not been a source of strength, as negative aspects such as high raw material prices and concerns about slowing consumption due to inflation have been emphasized. Automobile stocks, such as Toyota Motor Corp. and Mazda Motor Corp. which have benefited greatly from the weak yen, have fallen across the board. Amidst this lack of buying opportunities, one of the few bright spots is a change in the way the company deals with its shareholders. On June 15, Toyota Motor Corp. held its general shareholders’ meeting, and the general shareholders’ meetings for companies whose fiscal year ends in March is in full swing. The most noteworthy event of the year was the record number of shareholder proposals. According to Mitsubishi UFJ Trust and Banking Corporation, 77 companies received shareholder proposals, and the number of proposals reached 292.

Not to be overlooked is the increasing number of shareholder proposal withdrawals. Strategic Capital, an investment fund that submitted many shareholder proposals this year, withdrew its proposals for Arisawa Manufacturing and Kyokuto Trading. This is because Kyokuto Trading disclosed its cost of capital as requested, and Arisawa Manufacturing “acknowledged that President Yuta Arisawa himself has changed the management policy (to increase shareholder value)” (Strategic Capital) at the financial results briefing on May 13. In the majority of cases where a proposal was withdrawn, it is believed that the company had a dialogue with its shareholders and made at least a few compromises. Those companies that have begun to listen to their shareholders’ arguments have been able to hold their prices even during the recent sharp decline in their share prices. The share prices of companies that have withdrawn (or partially withdrawn) shareholder proposals in the past month have generally managed to keep their declines smaller than those of the Nikkei Stock Average during this week’s sharp selloff.

When shareholder proposals are simply put forward, the reaction of stock prices is mixed. This is because there are still many companies that thoroughly resist shareholder proposals. However, a “withdrawal” can be seen as the result of a company beginning to reflect dialogue with shareholders in its management policies, and this gives buyers a sense of security. Daiki Hosaka of Sumitomo Mitsui Trust Bank, Ltd. points out, “An increasing number of companies are gaining hints on how to improve corporate value through dialogue with investors, and mutual understanding is deepening. In fact, there have been a number of recent cases in which companies have been able to avoid submitting shareholder proposals through dialogue with shareholders. RMB Capital of the U.S., which has a track record of submitting shareholder proposals to Sanyo Shokai, Faith, and other companies, did not submit a shareholder proposal to a company whose fiscal year ended in March of this year. Masakazu Hosomizu of RMB Capital suggests that “shareholder activism may be ending its historical role in Japan.” The consensus that it is natural to focus on shareholder interests is becoming more prevalent in Japan. Of course, there are still companies that keep their distance from shareholders. However, “I will no longer invest in such companies, and they will be weeded out. From now on, I will invest in decent companies where dialogue is possible,” says Hosomizu. Will they shy away from shareholder proposals because they “don’t like to eat,” or will they accept them as “good medicine with a bitter taste? The market is observing companies more closely than expected.

Share prices of companies whose shareholder proposals were withdrawn are firm
Company NameShareholder Proposals WithdrawnStock Performance
Change from March 31, 2022Change from June 10, 2022
Kyokuto Trading (8093)Disclosure of Cost of Capital19.1%-2.2%
General Oyster (3224)Appointment of Directors-11.4%-0.7%
Tachi-S (7239)Share Repurchase11.7%-5.8%
Oi Electric (6822)Share Repurchase and Anti-Takeover Provision1.6%0.0%
Yamau Holdings (5284)Appropriation of Surplus13.5%-1.2%
Kyokuto Kaihatu Kogyo (7226)Reversal of Special Reserve3.4%-1.7%
Mitsuboshi Belting (5192)Share Repurchase and Restricted Stock Compensation37.6%-2.5%
Bunka Shutter (5930)Anti-Takeover Provision-1.3%-1.6%
Sreki Tokyu kogyo (1898)Share Repurchase7.1%-1.2%
Arisawa Mfg. (5208)Dividends Increase and Policystocks Reduction13.3%-1.3%
Nikkei 225 Index -5.4%-5.4%
(Source) Nikkei article on June 15, 2022.

Discussion Point 1: “Share prices of companies that have had shareholder proposals withdrawn in the past month have generally declined only modestly more than the Nikkei 225 during this week’s steep selloff.”

When the stock market is in a decline, the Nikkei newspaper reports stock price performance in relation to the movements of activist investors. As I have mentioned in the previous articles, activist investors do not evaluate performance in a short period of time, say a few months (much less a week). In addition, they often invest in companies that are not making effective use of their cash and are operating in a way that damages the value of the company. This may have something to do with the fact that the share price of a company with a large net cash position its market capitalization tends to outperform during a stock market decline. Therefore, it is reasonable to think that a causal relationship between the withdrawal of shareholder proposals and stock price performance cannot be well proven. It is expected to see articles with this argument repeatedly rehashed in the future when the stock market declines.

Discussion Point 2: “A consensus that it is natural to focus on shareholder interests is spreading in Japan.”

Some of the shareholder proposals introduced in the Nikkei article are quite reasonable, such as disclosure of cost of capital, elimination of the takeover bar policy, and reduction of policy shareholdings. It would be commendable if the company accepted some or all of these proposals. It can be inferred that the background to these shareholder proposals was that these shareholdings had a negligible impact on the voting rights of the shareholders. Other shareholder proposals include share repurchases, dividend increases, appropriation of retained earnings, reversal of the separate reserve fund, and other uses of cash. And all of these uses of cash call for shareholder returns. Certainly, in principle, excess cash should be returned to shareholders. However, these companies need to think about whether their investments and their use of cash for sustainable growth are sufficient. It is doubtful that they are returning cash without sufficient investment to ensure future growth. I wonder if the management accepted the shareholder return proposal easily in order to get through the shareholders’ meeting successfully, and I wonder if the management is seriously thinking about growth investment and shareholder return for the sustainable growth of the company, and if they had serious discussions and genuine dialogues with these shareholders regarding such management issues. Japanese corporate culture has a tradition of doing everything without making a fuss. For shareholders who are thinking about medium- to long-term investment, I believe that it is desirable to discuss the balance between growth and shareholder returns. Considering these factors, it seems premature to consider that “a consensus that it is natural to place importance on shareholder returns is gaining ground in Japan.”

In summary, I have discussed about the Nikkei article, “Shareholder Proposal ‘Withdrawn,’ Share Price Firm; Dialogue Leads to Compromise.” As for “share prices of companies whose shareholder proposals are withdrawn are firm even during a sharp stock market decline,” it is reasonable to think that the causal relationship between the withdrawal of shareholder proposals and share price performance is not well proven. It is well known that during a stock market decline, the stock price of a company with a large amount of net cash relative to its market capitalization tends to outperform. The results may have been different during an upturn in the stock market. As for “the consensus that it is natural to place importance on shareholder profit is spreading in Japan,” I have great expectations for that. Although there is a tradition in Japan’s corporate culture that it is considered good to carry out everything without making a fuss, what is required of Japanese management is serious discussion and dialogue with shareholders. For shareholders who are thinking about medium- to long-term investment, I believe that discussing the balance between growth and shareholder returns is something that should be desired. Considering these factors, it seems premature to think that “a consensus that it is natural to place importance on shareholder returns is gaining ground in Japan.

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