The troubled relationship between companies and shareholders in Japan is changing, and it is opening opportunities for sustainable finance to make its mark.
For decades the phenomenon of cross-shareholding has been rife in the country, with listed companies holding large numbers of shares in each other. Commercial banks tended to be at the centre of these networks of mutual shareholdings.
“Cross-shareholdings began to decline after the bursting of the bubble economy in 1990, and in the 2010s more than half of the shareholders had become investors who asserted their rights,” said Sparx Japan Sustainable Equity Strategy portfolio manager, Yu Shimizu (pictured).
Higher esteem
He said there were further improvements following the government’s corporate governance reforms in 2013. These events and shifts in corporate culture mean there is increasing scope for effective engagement with investee companies feeling more accountable to shareholders.
“As for the managers of large companies, most of them now understand the rights of shareholders and are willing to cooperate with them,” he said.
Shimizu noted shareholders had been held in low regard previously: “In the past, many people thought that shareholders were greedy, but over the past few years, there has been an increase in the view that shareholder engagement can have a positive impact on the world.”
The change in culture around shareholders and their potential positive impact seems to be making a difference to who is coming to work in investment, he said: “In interviews for analyst positions, many people used to apply because they sought higher wages, but now more and more people are applying because they want to be of service to the world.”
For sustainable finance and for Shimizu’s strategy this is certainly good news. He described how companies are more receptive to listening to shareholders at investor relations meetings.
“In my team, we take a survey after each investor relations meeting. The question we ask is, ‘What did you learn from the meeting?’
“More than 80% of the respondents answered that they had gained some kind of insight, and more than half of them said that they had learned something about ESG.
“I believe that these results show that companies view investor relations meetings not only as a place to communicate information to investors, but also as a place to listen to investors’ opinions,” said Shimizu.
Supportive engagement
When it comes to getting his team’s view across with investee companies, Shimizu has developed a particular form of engagement he calls coaching.
“Coaching means it is a very supportive and interactive dialogue style. That is a very useful tool for building good relationship with the management and a very good tool to suggest our opinion and for providing feedback to the management.”
Shimizu explained he wanted to put a more concrete process in place for the dialogue Sparx had been using for engagement. He undertook professional coaching training and developed the coaching method before rolling it out across his team in 2019. Now they use a type of engagement which allows Sparx and the investee company to “think together” to find solutions.
Apart from discussing investee company issues, the coaching process involves: positive “empowering” feedback; providing an alternative perspective through feedback; suggestions to request improvements; and suggestions to present specific improvement plans.
This is very different, Shimizu said, to the usual type of engagement from investors in Japan which he describes as a straightforward question and answer format.
Looking at sustainable finance more broadly, Shimizu concluded there are plenty of reasons to be optimistic: “The fact that investee companies take sustainability into consideration will lead to value creation and risk avoidance over the medium to long term, which in turn will positively affect portfolio performance.
“In addition, as more Japanese companies consider sustainability, the number of potential investment targets will increase, which will increase the likelihood of finding more attractive investments.”
