Japanese firms pitch reforms as ‘vanilla’ buybacks fail to placate investors

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“Vanilla” buybacks are not any longer enough to placate shareholders of Japan’s biggest firms, with a string of conglomerates sacking chief executives and selling assets because the country’s corporate governance drive gains pace.

Toyota, Japan’s most precious company, unveiled plans last month to trim its board from 16 members to 10 and make half of them independent, up from 40 per cent previously. It’s going to also create a separate supervisory committee meant to enable stronger audits and monitoring of management.

Seven & i Holdings, owner of the 7-Eleven convenience store chain, has launched into a radical restructuring and replaced its unpopular chief executive, while consumer electronics group Panasonic is restructuring, cutting costs and exploring the sale of several businesses, including its iconic but struggling TV unit.

Other groups which have replaced their chief executives or are considering sales of non-core assets include Rohm Semiconductor, which is overhauling management because it prepares to report its first annual loss in 12 years, and Kyocera, which in January signalled plans to divest low-profit units answerable for $1.3bn, or 10 per cent, of revenue.

The moves are a part of what investors and analysts say is a growing appreciation by firms that they’ll now not depend on share buybacks, which have hit successive records lately, to maintain investors blissful, with one fund manager describing it because the staid or “vanilla” option.

“Calls for board changes were one among the most important themes in last 12 months’s [annual meetings], and that decision is barely going to get louder this 12 months,” said Nicholas Smith, an analyst at CLSA in Tokyo. “The very final thing that Japan investors want is ‘more of the identical’.”

Their demands come amid a broader corporate governance overhaul by the federal government, stock exchange and regulators. In 2014, lower than 10 per cent of Japan’s 500 largest listed firms had no less than one-third outside directors. Now, the portion is greater than 98 per cent.

This has emboldened investors to hunt tangible changes beyond one-off returns of capital, including board reforms and better dividends.

“Investors see large buybacks as an indication that management has run out of profitable growth ideas to reinvest money flows in,” said Smith. “It doesn’t encourage confidence . . . the company governance revolution in Japan is much more about shaking up management to lift margins and lift growth than about buybacks and asset stripping.”

“Assuaging investors by writing a bigger cheque is straightforward,” said David Mitchinson, partner at specialist Japan fund Zennor Asset Management. Selling non-core assets and focusing operations is “much harder” and the “next stage of reform”.

Seven & i Holdings, which is in the course of a takeover battle with Canada’s Alimentation Couche-Tard, unveiled plans this month to list its North American business within the US and replace Ryuichi Isaka with its first foreign chief executive, Stephen Dacus, to fend off investor dissent.

It has also planned as much as ¥2tn ($13bn) in share buybacks after selling a stake in non-core stores to Bain Capital.

Corporations have also been unwinding parent-subsidiary shareholdings, which the Tokyo Stock Exchange has said may lead to mistreatment of minority shareholders. Retailer Aeon this month announced it might buy out shareholders in two subsidiaries.

An individual conversant in Toyota’s considering said its board changes were a pre-emptive move to satisfy investors ahead of its annual meeting in June.

Last 12 months, two US proxy firms advised shareholders against reappointing the chair after the corporate got here under fire over testing data scandals at subsidiaries. Akio Toyoda was re-elected with 72 per cent support, a drop from 84 per cent a 12 months earlier.

At a press conference last month, Takanori Azuma, head of human resources at Toyota, denied the board changes were linked to the testing data scandals and said they were geared toward improving board discussions and a part of a “constant evolution”.

Activist shareholders have already began to go on the offensive, rallying investor support for his or her proposals to firms with annual meetings this month.

Oasis Management and 3D Investments have staged campaigns to overhaul governance at cosmetics maker Kao and beer producer Sapporo respectively.

Corporate actions at a look

TOYOTA

Reduced board size from 16 members to 10, with half coming from outside
Established separate audit and supervisory committee with three independent directors

NISSAN MOTOR

PANASONIC