Japanese Corporates Embrace Shareholder Value Creation: Govt. Initiatives & TSE Pressure Spurring Cash Returns

According to recent data, Japanese companies have significantly improved their corporate governance practices over the past few years. This is supported by various measures taken by the Japanese government and the Tokyo Stock Exchange (TSE). For example, the country’s government has encouraged companies to prioritize shareholders’ interests for several years, and the TSE began pressuring executives to increase returns to shareholders two years ago. As a result, Japanese companies are now returning more cash to shareholders, with dividends increasing to ¥19 trillion in the financial year ending March 2023, more than double the level seen 10 years ago. Share buybacks have also increased five-fold during this time. The total payout ratio, which represents the percentage of net income paid out to shareholders through dividends and buybacks, reached 53% last financial year, compared to 35% in fiscal year 2013. Activist investors, who are attracted by the high levels of cash held by Japanese firms, are increasingly targeting these companies. They believe that holding onto cash is an inefficient use of capital, and instead, it should be used to benefit shareholders. Many investors are urging companies to reduce their cross-shareholdings, which are still relatively common in Japan, as they can lead to friendly shareholders who may not challenge management decisions. There is growing pressure on companies to address issues such as low return on equity, excessive cross-shareholdings, and a lack of gender diversity on boards. Women now make up 17% of board seats in Japan, up significantly from 2.3% a decade ago. Institutional investors are also becoming more vocal in their opposition to proposals from companies, particularly CEO appointments. These trends suggest that Japanese companies are moving towards more shareholder-friendly approaches to capital usage, which could help explain the recent rally in the country’s benchmark index.