Japan 2023 Proxy Season

Summary of Shareholders' Proposals for the June 2023 Shareholders' Meetings

• Activist shareholder proposals continued to increase, reaching a record high in 2023.
• Unusual approvals of shareholder proposals are attracting attention.
• A trend in listed companies trying to increase shareholder returns in response to the Tokyo Stock Exchange's ("TSE") March 2023 request.
• Activists are proactively making proposals to improve corporate governance, in addition to balance sheet related proposals.
• Support for ESG-related shareholder proposals from environmental groups weakens.

The Number of Shareholder Proposals Made by Activist Shareholders, Votes Against Management Proposals and Listed Companies Facing Shareholder Proposals Each Continue to Trend Upward in Japan

During the June 2023 annual meeting season, shareholders made a total of 385 shareholder proposals made to 90 Japanese publicly listed companies. These figures represent a 16% rise in the number of companies subject to shareholder proposals and a 31% rise in the total number of shareholder proposals since the June 2022 proxy season. Both are record high numbers and represent an outstanding 237% and 63% increase, respectively, over 2021 figures. Institutional investors submitted a total of 125 shareholder proposals to 41 companies. Of the 385 shareholder proposals: two requested the sale of cross-shareholdings and related amendments to constitutional documents; 30 requested that special dividends be paid to shareholders while 24 were for share buybacks; and one pressed for changes to the capital structure. At least 58 proposals pressed for changes in board composition. Three percent of corporate governance shareholder proposals were passed. Four percent of balance sheet-based shareholder proposals were passed. One hundred and seven shareholder proposals received more than 20% approval from shareholders and 49 received more than 30%.¹

Unusual Approvals of Shareholder Proposals Attracting Attention

Shareholder proposals passed in unusual circumstances during the June 2023 annual meeting season in Japan attracted significant attention. One example was the set of Yamauchi-No.10 Family Office ("YFO") proposals to Toyo Construction, which resulted in seven of nine director candidates, including executive director candidates, proposed by YFO, being appointed to Toyo Construction's board of directors, forming a majority of the board.^2-3 Going forward, it will be interesting to see whether there is an increase in cases like this where more shareholder proposals, which were previously almost always rejected as a matter of course, receive votes in support from institutional investors based on the content of the proposal and are approved more often. We are particularly interested to see how institutional investors cast their votes in such situations, as they are often required to explain their votes based on their own voting rights exercise standards.

Shareholder and Tokyo Stock Exchange Pressure to Increase ROE of Japanese Companies

In recent years, institutional investors have scrutinized management proposals more stringently, with influential voting guidelines encouraging more ‘no' votes for proposals that would lead to low return on equity. In turn, activists have continued to propose higher dividends or special share buybacks with significant shareholder support. On March 31, 2023, the TSE requested that listed companies take measures to conduct their businesses with a greater focus on cost of capital and stock prices (the "Request").⁴  The Request is the latest chapter in the reformation and strengthening of corporate governance by the Japanese government and the TSE—a process that started in earnest almost ten years ago with the passage of the first Stewardship Code in 2014. The Request specifically points out that the Corporate Governance Code of Japan (Principle 5.2) requires companies to sufficiently consider profitability and to enhance corporate value over the mid-to-long term.⁵  Almost 50% of the companies listed on the Prime Market and 60% on the Standard Market have ROE below 8% and Price to Book (P/B) ratios below 1, which the TSE identified as being problematic vis-à-vis return on capital and long-term growth potential. 

Following the Request, many listed companies have announced record dividends and numbers of share buybacks, increasing their ROE. In 2023, as many as 64 companies, according to Nikkei, have increased their return of capital to shareholders, despite forecasts of decreased net profits.⁶  Honda announced a JPY 200 billion share buyback—approximately 4% of issued shares—and record dividends of JPY 150 per share for FY2023 (JPY 120 in FY 2021 and FY2022), even though the earnings of FY 2023 per share attributable to owners of the parent company were lower than in 2022.⁷ Shimizu also announced a share buyback for 2024 of up to JPY 20 billion, or roughly 4% of issued shares, to increase its ROE and P/B ratio.⁸ The Request and its impact appear to be viewed positively by domestic and international investors alike⁹ and to have already influenced their behavior.¹⁰

The focus of the Request, however, lies in long-term increases of profitability. While the TSE views share buybacks or special dividends as legitimate tools to achieve higher ROE in the short-term, the Request envisions companies making fundamental changes to their business, as well as to strengthen dialogue with shareholders.¹¹  The guidelines suggest that issuers establish and communicate of profitability KPIs to achieve higher profitability in the long term. Nevertheless, many investors still requested share buybacks and special dividends from companies during this year's proxy season. Secom shareholders voted down  Dalton Investment's proposed share buyback of approximately 10%¹³  of issues shares to decrease cash holdings and increase Secom's ROE from approximately 8% to 10%.¹⁴ Obayashi Corporation's shareholders similarly rejected Silchester International Investors' proposal for a special dividend of JPY 12 per share to bring the total dividends to a level of 100% of the Company's net income not directly related to the core business plus an amount equal to 50% of the net income from its core operating business.¹⁵  While this request was in line with common dividend policies in the United States or Europe, Japan has historically, however, seen most companies allocating 50% of net income to dividends and share buybacks.¹⁶ Obayashi and Secom both opposed the respective proposals arguing that they need cash for future business transformation to increase profitability in the long term and to stabilize the business to ensure its longevity.

Special dividends and share buybacks may continue to encounter opposition in the future from some shareholders if companies argue similarly to Obayashi and Secom that cash is needed to substantially reform the business toward higher long-term profitability and to achieve the goals of TSE's new Request, and if shareholders find such arguments credible based on management's track record. However, if cash stockpiles continue to accumulate unused thereafter, one would expect investors to be skeptical. It will be interesting to see whether the record-breaking share buybacks and dividend payments will continue or come to an end.

Corporate Governance: Independent Boards, Female Directors

Although this is not an example of a shareholder proposal, at Canon Inc.'s 2023 AGM, the re-election of CEO Fujio Mitarai to the board of directors received only 50.59% support. Canon Inc. did not submit a proposal to elect a female director this year, which is reportedly partly due to the opposition of several institutional investors against the criteria for women and diversity.¹⁷

Proxy advisory firm Glass Lewis notes that many investors had previously made Japan market-specific exceptions to their board gender diversity policies, but that investors may be less patient with Japanese companies going forward. ¹⁸

The two issues of outside directors and female directors are intertwined for those companies with gender diversity challenges in management: board members are, traditionally, insiders, rising to the board after many years of internal promotions as managers; meanwhile, many companies have a dearth of female employees at the managerial level. In other words, so long as Japanese companies hew to their preference for insider directors, those companies that fail to promote or hire and retain women in the managerial pipeline, will continue to have difficulty in achieving a gender diverse board. Such companies might seek to find female board candidates by appointing outside directors—external professionals such as lawyers, accountants, and university professors. Hiromi Yamaji, the CEO of the Japan Exchange Group Inc., provided the following explanation: "If we appoint (female board members) within our company, they would be women who have been working here since joining our company, but we were slower in hiring women than securities firms and other companies....We will consider appointing them from our company in the future.¹⁹" Hiromi Yamaji further stated in an interview with Bloomberg in reference to a push to achieve a 30% level of female representation in executive positions that "We have to be the role model among listed companies, so we will try to fulfill the requirements way before the 2030 deadline."²⁰  On the other hand, perhaps the path of least resistance for Japanese companies who lack female managers is to appoint directors who are both female and external: as of 2022, the norm among institutional investors is to require boards to be at least 1/3 independent (i.e., composed of outside directors), and many investors' proxy voting guidelines contain a gender diversity policy. Proxy advisory firm ISS and other observers surmise that gender diversity on Japanese boards will probably come primarily via outside directors. 

Of the 29 major companies on the TSE with no female directors, 20 appointed women to their boards at their June 2023 shareholders' meetings, while the nine companies that bucked the trend all have stable, major shareholders, e.g., parent companies and management families.²¹ For example, Acom Co., a subsidiary of Mitsubishi UFJ Financial Group Inc., opposed a proposal from a European institutional investor it received last year to revise the articles of incorporation to require at least one female director. The company released a Q&A summary paper before its general shareholders' meeting this year and stating that there was no specific reason for its lack of female board members, "but we are promoting gender diversity and will consider (appointing female directors) in the future." Acom Co. also said that "personnel with skills required for directors will be selected regardless of gender and nationality as board member candidates."²²

Another company that declined to appoint a female board member was Taisho Pharmaceutical Holdings Co., nearly 40% of whose shares are held by management families and foundations. They noted "[w]e understand the global trend (of ensuring diversity) and continue to consider the matter."²³  The company's diversity policy on its website provides that it has set a target to have "female workers holding 18% of management-level positions (section chief equivalent or higher) by the end of fiscal 2025."²⁵ Canon Inc. similarly has no female directors but stated in its 2023 corporate governance report that it intends to appoint one female director at the next general shareholders' meeting.²⁵

ESG related shareholder proposals increase in number but falter in support

The 2023 proxy season saw a record-breaking number of climate centered proposals up for a vote. This year, out of the 90 corporates that received proposals, eight companies received proposals related to environmental measures.²⁶

A number of notable proposals this year focused on companies reporting on how their business aligns with the 2015 Paris Climate Agreement.²⁷  Akademiker Pension, for the third consecutive year, filed an ESG-related proposal with Toyota.²⁸  This year, along with Dutch manager APG and Norway's Storebrand Asset Management, Akademiker Pension asked Toyota to report annually on how its lobbying aligns with the goals established in the Paris Agreement.²⁹ The trio was able to garner 15% of the vote in June.³⁰ J-Power received consecutive proposals this and last year from a collection of investors, Amundi, HSBC, and this year, the Australian Center for Corporate Responsibility (ACCR).³¹  This year's proposal asked the utility to set and disclose Paris Agreement-aligned emission reduction targets and to report on how its renumeration policies incentivize progress away from emission targets.³²  Both of these proposals gained 21 and 15% support, respectively.³³  Proposals raised at shareholder meetings Mitsubishi UFJ, Sumitomo Mitsui, and Mizuho calling on them to create and disclose a transition plan to align their investment strategy with the Paris Agreement secured support between 17-21%.³⁴

Following several scandals throughout the industry, nine Japanese energy companies received shareholder proposals this year, with two of them focusing on climate.³⁵ Pressure also continued to mount on Japanese energy companies from environmental NGOs in both Japan and abroad. Market Forces, an Australian environmental NGO, and the Japanese Kiko Network, submitted proposals to both Tokyo Electric Power Company (TEPCO) and Chubu Electric Power Co. calling for the energy giants to align their capital allocation with their plans to achieve net zero emissions by 2050.³⁶  Both Market Forces and Kiko Network submitted proposals to TEPCO and Chubu in 2022 to disclose business plans that included greenhouse gas emission-reduction targets.

Support for ESG-related proposals appears to be trending downwards. In 2020, Kiko Network submitted a proposal to Mizuho Financial Group, one of Japan's largest banks, to disclose climate risks and publish a plan to align its investments with the Paris Climate Agreement.³⁷  While that proposal received an impressive 34% support, approval rates for ESG-related proposals in 2023 are hovering between 15 and 20%. Since Kiko Network's proposal and the Japanese government's 2020 declaration of achieving carbon neutrality by 2050, many Japanese companies have responded by halting investments in new coal-fired power plants, investing in clean energy transition, and releasing their own plans to go carbon neutral by 2050. Although no proposals have been passed in this three-year period, past shareholder proposals concerning environmental issues have had a significant impact on the responses of Japanese companies. As a result, investors may have been less motivated to vote in favor of environment related proposals this year. It will be worth paying attention to future year's approval percentages for ESG related proposals to see whether this year is the start of a new trend of reduced support for ESG proposals, or whether this year's reduced support was merely an outlier.

List of Shareholder Proposals by Activist Investors at the June 2023 Shareholders' General Meetings³⁸

_{1 Calculated by White & Case based on XeBRal ADDS search results and other public materials.
2 TOYO CONSTRUCTION CO., LTD. "Notice of the 101st Annual General Meetings of Shareholders" June 8, 2023.
3 TOYO CONSTRUCTION CO., LTD. "Extraordinary Report (臨時報告書)" June 30, 2023.
4 Tokyo Stock Exchange, Inc. "Action to Implement Management that is Conscious of Cost of Capital and Stock Price" March 31, 2023.
5 See footnote 4 above.
6 Nikkei Asia "Japan Inc. annual dividends at record levels again" June 8, 2023.
7 Honda Motor Co., Ltd. "Notice of Convocation of the 99th Ordinary General Meeting of Shareholders" June 5, 2023, and Returning Profits to Shareholders.
8 Shimizu Corporation "Announcement Regarding Decision to Implement Share Buybacks and Cancel Treasury Stocks" April 26, 2023.
9 The Japan Times "Hedge funds pushing for Japan returns get help from Tokyo exchange" May 22, 2023.
10 Nikkei Asia Market Spotlight "Japan stocks soar as global investors applaud governance changes: ‘This is no longer foreigners versus Japanese people,' activist says" May 22, 2023.
11 Tokyo Stock Exchange, Inc. "Better Dialogue with Shareholders and Related Disclosure" March 31, 2023. Tokyo Stock Exchange, Inc. "Using "Explain" to Contribute to Constructive Dialogue" March 31, 2023.
12 SECOM CO., LTD "Notice of Resolutions of the 62nd Ordinary General Meeting of Shareholders" June 27, 2023.
13 SECOM CO., LTD "Notice of Convocation The 62nd Ordinary General Meeting of Shareholders" June 5, 2023.
14 Dalton Investments "Dalton Issues Presentation on Details of a Shareholder Proposal for Secom Co. to Execute a Share Buyback - Dalton Investments and Shareholder Proposal for Share Buyback" May 2023.
15 Obayashi Corporation "Opinion of the Board of Directors if the Corporation Regarding the Shareholder Proposal" May 11, 2023.
16 See footnote 6 above.
17 Asahi Shimbun "Listed Companies Work to Fill More Top Positions with Women" June 21, 2023.
18 Glass Lewis "Japan's 2023 Proxy Season: Shareholder Proposals, Climate, Capital Efficiency & Gender Diversity" May 30, 2023.
19 See footnote 17 above.
20 Bloomberg "Japan Stock Exchange's Board Diversity Is Among Worst in World" September 11, 2023.
21 See footnote 17 above.
22 Acom"Q&A summary and answers to preliminary questions for Annual General Shareholder Meeting (46th) (第46回定時株主総会　質疑応答概要および事前質問へのご回答)" June 28, 2023.  
23 See footnote 17 above.
24 Taisho Pharmaceutical Holdings Co. Diversity Policy.
25 CANON Inc. Corporate Governance Report as of September 29, 2023.
26 Responsible Investor, "ESG Resolution Round-Up: Are Climate Proposals Becoming Mainstream in Japan?" July 11, 2032.
27 See footnote 26 above.
28 TOYOTA MOTOR CORPORATION "Opinion of the Board of Directors on the Shareholder Proposal" May10, 2023.  
29 See footnote 28 above.
30 TOYOTA MOTOR CORPORATION "Voting Results of the 119th Ordinary General Shareholders' Meeting (Extraordinary Report)" June 15, 2023.  
31 ACCR "ACCR Shareholder Resolutions to J-Power on emissions reduction targets and remuneration incentives" May 9, 2023.
32 See footnote 31 above.
33 J-Power "Voting Results of the 71st Ordinary General Meeting of Shareholders" June 29, 2023.
34 MUFG "Results of Exercise of Voting Rights (Filing of Extraordinary Report)" July 3, 2023.
SMFG, "Extraordinary Report (臨時報告書)" July 4, 2023.
Mizuho, "Filing of Extraordinary Report" June 28, 2023.
35 Nikkei Keizai Shimbun "Power companies Lose Trust due to Cartel of Shareholders'Meeting and Illegal Viewing" June 28, 2023.
36 Kiko Network "[Press Release] Six companies in Tokyo Prime Market, including all three"Mega-banks" face climate shareholder resolutions" April 11, 2023.
37 Kiko Network "[Press Release] Massive global shareholder backing for Mizuho climate shareholder proposal" June 25, 2020.
38 Prepared by White & Case based on XeBRal ADDS search results and other public materials.}

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