Wednesday, February 8, 2023

Japan Inc. faces potential forced sale of cross-shareholdings

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Japanese companies face a historic Tokyo Stock Exchange reshuffle and aggressive new directives from proxy advisers designed to force a sell-off of the widely criticized country. “Cross-shareholding” networks.

The changes could force companies in banking, construction, food and transportation – sectors in which the problem is most acute – to offload cross-actions over the next few weeks to flatter their appearances ahead. Japan’s fiscal year end in March, analysts said. .

Cross-shareholdings are interconnected portfolios of ownership between Japanese listed companies, which protect underperforming managers with an automatic cushion of investor support.

Although cross-shareholdings have been on the decline since a peak in the 1990s, companies justify them as necessary to “maintain a business relationship” – infuriating fund managers who see such networks as a recipe for complacency, low returns on equity. and bad governance.

Almost 11 percent of Japanese listed companies have a listed shareholder holding a stake of more than 30 percent. This compares to 0.9 percent in the United States and 0.2 percent in the United Kingdom.

“The opportunities to exploit this information in a harmful way in Japan are much greater because the legal infrastructure that covers the issue is so much more lax,” said CLSA Japan strategist Nicholas Smith.

But there are growing signs of a multi-pronged attack on the practice.

As part of a major overhaul in April, the TSE will streamline its six boards and 3,753 listed shares at three levels: premium, standard and growth. Membership in the desirable prime index will depend on the level of free float market capitalization as of March 31, excluding cross stocks.

The change should in theory push a number of companies to ask crossholders to sell their holdings before the end of March to qualify for the prime index and the huge investment that will follow the new index, the chief strategist of Mizuho Securities Masatoshi Kikuchi.

In October, U.S. proxy advisor ISS implemented new guidelines requiring investors to vote at shareholder meetings against directors of any company that allocates 20 percent or more of its net assets to cross-holdings. The proposals will apply from February 2022, but will be based on holdings as of March 31 of that year.

Rival proxy advisor Glass Lewis followed suit with a firmer proposal, putting the limit at 10%.

According to Goldman Sachs, about 9 percent of companies listed in the first section of the TSE will not meet the ISS requirement, including advertising group Dentsu, Kyocera and Mitsubishi Heavy Industries.

While many analysts predict a decisive impact on Japan’s largest companies and its immense hinterland of listed mid-cap companies, others are warning investors to expect a campaign of reform crushing from the US. powerful Keidanren business lobby.

ISS and Glass Lewis are not as influential in Japan as they are in the United States, analysts note, and separate efforts to convince investors to vote against underperforming directorships have failed.

Recent activist campaigns have targeted cross-actions, which has led to an acceleration in sales of “strategic holdings” by companies such as Fujitsu, the shipping group NYK Line and the Mitsui trading house.

But the complex cross-shareholdings held by Toyota, one of the most powerful companies in the country, point to the limited progress.

While Japan’s largest automaker has shed stakes in some of its suppliers in recent years, it still held shares in 65 listed companies at the end of March 2020 – a figure even higher when considering other stakes. held by the companies of its group.

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