PFA Chief warns of weak governance among Japan corporates

Cross-shareholding is the root problem of corporate Japan, said Daisuke Hamaguchi, chief investment officer of the Pension Fund Association of Japan at the FT Investment Management Summit Asia 2017 in Hong Kong.
 
Hamaguchi added that in this context, pensions funds like them are in “serious conflict of interest with 'allegiant shareholders', who profit from business by voting yes, while institutional shareholders like the PFA only profit from stock returns.”
 
“What needs to be done is a drastic reduction of this cross-shareholding otherwise the stewardship code and stewardship activities which are being discussed now in Japan cannot be effective,” Hamaguchi said. “Without the unwinding and drastic reduction of this shareholding, I'm afraid everything might end up as formalities, which the Japanese are very good at.”
 
Hamaguchi also expressed concern that if Japan stays with the status quo for the coming decade then it might see more cases of Toshiba and Sharp. “That is a total destruction of company value, and things should happen before that,” he said at the conference.
 
PFA, which has assets of ¥11.8 trillion ($107 billion; €96 billion) as of 31 March 2016, is one of the largest pension funds in Japan. It invests pension assets in domestic and international markets through in-house and external asset managers.
 
PFA allocates nearly 60 percent of its portfolio to foreign and domestic bonds, and the remaining 40 percent in foreign and domestic equities. Private equity investments in buyouts and venture capital account for about 4 percent of its equity exposure.
 
He pointed out that almost all companies in Japan hold other companies' shares in order to expand or maintain the business relationship – a remnant of traditional business relationships as well as part of anti-takeover measures against foreign companies post-WWII.
 
This persists today with mega banks like Mitsubishi, Mitsui and Mizuho holding shares of around 3,000 Japanese listed companies, as well as large insurance companies and manufacturers such as Toyota, Hitachi and Nippon with holdings of up to 400 domestic companies.
 
This web of cross shareholdings, according to Hamaguchi, have tied up large chunks of shares amongst group companies into management-friendly blocks, and institutional investors were viewed as having passive policies that lead them to either blindly vote in line with management, or to simply not exercise their votes at all.
 
Hamaguchi admitted the reduction of cross-shareholdings is not an easy thing to do because the system is deeply rooted in corporate society. He is, however, optimistic that younger generations' sense of corporate culture is changing.
 
“I think there is a good chance we can achieve this major restructuring of the stock market. If Japan succeeds, it will lead to the solution of many fundamental issues such as low return on equity or poor performance of the stock market compared to other countries. We can also expect more M&A activities by domestic and foreign companies, which will contribute to a more proactive restructuring of the industry and free movement of labour force,” he said.