Japan’s corporate governance push to cause ‘a lot of action’ this AGM season

Stricter voting guidelines 'may result in board shuffles as shareholders hold directors to account'

Japan is undergoing a sea change as the country’s government pushes savers to become investors, opening up opportunities for better corporate governance to emerge in the upcoming AGM season.

Prime minister Fumio Kishida unveiled his flagship initiative 18 months ago aimed at boosting economic growth and addressing social challenges, based on a strategy of persuading Japanese citizens to buy domestic stocks.

Market watchers believe this reform is about to enter a new phase, improving governance and boosting the long-term appeal of Japanese stocks.

Sam Perry, senior investment manager at Pictet Asset Management, said: “If Japan is to become a nation of shareholders, this also augurs well for foreign investors. Not least because the emergence of a large domestic shareholder base should accelerate efforts to raise Japanese corporate governance standards.”

AGM action

Japan is therefore fast becoming a key jurisdiction for shareholders to engage with companies with resolutions. Last year had a big focus on the automotive, steel and banking sectors, and market watchers are keeping an eye on companies in these sectors this year too.

Kathlyn Collins, vice-president and head of responsible investment and stewardship at Matthews Asia, and an ESG Clarity Asia Committee member, is expecting “a lot of action at Japanese company AGMs in the coming weeks”.

This, she said, is because there have been many changes that domestic asset managers have made to their voting policies for this season.

“This includes around things like board diversity, strategic shareholding, and return on equity criteria,” Collins said, adding stricter voting guidelines “may result in board shuffles as shareholders hold directors to account”.

In terms of companies to watch, Collins expects heightened scrutiny around companies with low price-to-book ratios, “something the market has criticised for some time”.

Price-to-book ratio

The Tokyo Stock Exchange in January published its draft amendment to motivate listed companies to take action to improve their corporate value, which came into force this month. The amendment also expects prime listed companies to have a price-to-book-value ratio above one, which has further encouraged investors to improve the capital efficiency of companies and the unwinding of cross shareholdings.

Half the companies listed on the Tokyo Stock Exchange have persistently commanded a price-to-book ratio of below one and return on equity below 8%, Pictet’s Perry pointed out. This compares poorly against a return on equity of 19.4% for the S&P 500, albeit at a price-to-book ratio of 3.9.

Perry added: “The expectation now is that Kishida’s renewed drive to establish a culture of share ownership across Japan will add greater momentum to the Tokyo Stock Exchange’s own efforts to improve corporate governance and shareholder returns.”

Gender on boards

In addition, investors expect Japanese companies to continue to implement effective board governance and board composition.

Haonan Wu, manager for engagement for EOS at Federated Hermes, pointed out Japanese companies still lag in terms of independence ratio and gender diversity at the board level compared with other developed markets.

Wu said: “We expect to see continued pressure on companies to demonstrate the effectiveness of board governance by disclosure, or allow investors to engage in dialogue with independent directors and appoint women directors to the board.”

EOS at Federated Hermes’s proxy voting policy expects Topix 100 companies to have at least 15% women board representation and cross shareholding of net assets to be less than 10% for all the Japanese companies.


Wu added there is the expectation for Japanese companies to demonstrate an alignment of climate strategy with the limit on warming to 1.5 degrees Celsius, as the number of members to the Net Zero Asset Managers initiative increases.

“With investors implementing climate change into their ESG voting criteria and shareholder proposals submitted to the financial, trading house and utility sector in Japan, we expect a continued focus on climate change engagement in the upcoming AGM season,” Wu said.

Federated Hermes’ proxy voting policies also extend to the themes of climate change, biodiversity and human rights.