Japan’s 2024 Proxy Season: What to Watch For

Have recent corporate governance reforms had a material impact on Japanese companies and the wider market? This year’s proxy season will help to answer that question, as boards answer questions from their shareholders on capital efficiency, climate and ESG topics, board gender diversity, and oversight of compliance risks, among other topics. In this post, we provide an overview of what to expect.

Capital Efficiency

Ahead of the 2023 proxy season, the Tokyo Stock Exchange (TSE) published “Measures to Achieve Management Conscious of Cost of Capital and Stock Price”, encouraging the boards of Prime and Standard Market-listed companies to examine and formulate policies, targets, plan periods, and specific initiatives to improve cost of capital and return on capital, along with P/B ratio and market valuation. This regulatory push follows a significant increase in shareholder pressure over capital management policies.

The increase in regulatory and investor focus appears to be having an impact. When the TSE made its push, approximately half of the listed companies in the prime market had P/B ratios below 1x. As of end of March 2024, approximately 60% of the listed companies in the prime market have P/B rations above 1x.

Nonetheless, a significant number of companies have yet to make strategic changes to address sluggish capital efficiency; meanwhile, investor expectations — and willingness to exert pressure — continue to increase. Some Japanese domestic asset management companies have announced changes to their proxy voting policies, including increasing their ROE policy from 5% to 8%, establishing a P/B ratio policy, or both; and 2023 saw a spike in the number of shareholder proposals focused on share buybacks (see below).

Further, cross-shareholdings, which are said to negatively impact both corporate governance and capital efficiency, will continue to face demands for reduction – for example, at Keisei Electric Railway Co., Ltd. and Toyota Industries Corporation.

Shareholder Proposals

Changing expectations have also been expressed through shareholder proposals, with a 42% increase in the number of share buyback-related resolutions last year. That contributed to a 28% rise in the number of overall shareholder proposals.

Over half of last year’s shareholder proposals were focused on ESG issues. Investor focus on ESG looks set to continue, and may be expanding beyond companies in high-risk industries. For the 2024 proxy season, climate-related resolutions have been submitted to a variety of Japanese companies, including Sumitomo Mitsui Financial Group, Inc. as well as more traditional targets like Nippon Steel Corporation (5401), Chubu Electric Power Company, Incorporated. The Nippon Steel proposal was jointly submitted by the Australian Centre for Corporate Responsibility (ACCR), an investor engagement group, Corporate Action Japan, and Legal & General Investment Management.

Gender Diversity

Board composition is another area where evolving societal expectations are having an impact. Pressure has come from the government and regulators, with Prime Minister Kishida indicating a goal of at least 19% board gender diversity by 2025 and 30% by 2030, as well as investors. Overseas asset managers who have historically given Japanese companies a pass on gender diversity have begun to apply their standard voting policies, and it’s not only global investors making the push — a number of Japanese domestic investors have introduced a voting policy of requiring at least one woman on the board.

As a result, in 2023 there was a significant increase in opposition to certain nominees, including top members of management, at Prime-listed boards with no female directors. In response, many Prime-listed companies have appointed at least one woman to their boards for the first time, with the percentage of Prime-listed companies that don’t have a single female director dropping from 20.8% in 2022 to 12.2% in 2023. Investors have responded: whereas the re-election of CANON CEO Fujio Mitarai received only 50.6% support last year, reportedly due to gender diversity concerns, in March 2024 the same proposal received 90.9% support after Canon appointed its first female director.

Notably, most companies appear to be on board with this shift. As part of a recent Glass Lewis survey, we asked companies for their feelings about the trend of board gender diversity concerns leading to high opposition against the appointment of top management. Only 5.7% of the companies answered that the trend was “not appropriate”, and a majority of respondents showed some level of acceptance, if not enthusiasm, regarding investors’ new expectations.

Compliance and Risk Management

Governance improvements aligning the Japanese market with international best practices have attracted investors from other parts of the globe; however, market-wide reforms have the effect of heightening the spotlight on outliers whose shareholders have concerns regarding board oversight. For example, Toyota Motor is facing pressure over allegations of fraudulent activities throughout its Group companies related to safety and emissions certifications; while at Eneos Holdings, three top executives have left the group in the past two years due to inappropriate behavior toward women, including former chair and CEO in August 2022 and the former president in December 2023. With the question of whether recent market-wide governance reforms were substantive or superficial still not fully answered, attention is now focused on how these companies will respond, and how institutional investors will exercise their votes.

Looking for More?

With thousands of AGMs taking place in June, Glass Lewis’ Tokyo-based team is here to help.

Our Proxy Papers, which now feature Kanji-language director names within the report, provide the information you need to make your vote decision, with industry-leading 20-day average lead times.

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Additional Resources

On-Demand Glass Lewis Benchmark Policy Guidelines for Japan Webinar: Watch Now (Japanese) | Download Presentation (English) | Download Presentation (Japanese)

Gender Diversity in Japan — Roundtable Discussion & Corporate Survey: Executive Summary