Japan wanted change in its corporate sector. It got it — for better or worse.
A decade from the introduction of the country’s first Corporate Governance Code, there is so much mergers and acquisitions (M&A) activity in Tokyo these days that it is tough to even keep track. From private equity to activist investors to consolidation among companies fearful they would be targeted next, no acquisition seems beyond the pale.
Consider just a handful of examples in recent weeks: A foreign company is making an exceptional unsolicited bid for Shibaura Electronics Co. Having seen off the advances of Nidec Corp CEO Shigenobu Nagamori, Makino Milling Machine Co is selling itself to private equity firm MBK Partners. Activists have scooped up stakes in everything from insurer T&D Holdings Inc to tablet maker Wacom Co and Final Fantasy creator Square Enix Holdings Co. The communications giant Nippon Telegraph and Telephone Corp is buying out its artificial intelligence unit, NTT Data Group Corp, in a ￥2.37 trillion (US$16.07 billion) deal, while its mobile unit, Docomo, is acquiring online bank SBI Sumishin Net Bank Ltd — which only went public in March.
Illustration: Yusha
And that is before we even get to the multibillion mega deals for Toyota Industries Corp and, potentially, the Canadian acquisition of Seven & i Holdings Co.
In June 2015, Japan adopted the code, which encouraged management to prioritize long-neglected shareholders. While change did not happen overnight, in subsequent years, it has filtered through to the country’s boardrooms and, along with the weak yen, created urgency among foreign investors who sense that they risk being late to the game. Whereas once, Japanese firms would close ranks, leaning on cross-shareholdings or stable investors to ignore approaches they did not like, these days boards are forced to engage.
Not everyone is happy with the knock-on effects of today’s “Japan for sale.” One such critic is Yoshihisa Kainuma, the head of Minebea Mitsumi Inc, which has stepped in as a “white knight” in the unsolicited bid for Shibaura Electronics from Taiwan’s Yageo Corp (國巨).
Kainuma, whose firm supplies Apple Inc and Nintendo Co, said he thinks Shibaura’s technology should be kept in Japanese control.
“If it is okay for anyone to buy our companies and we sell everything to foreigners at a high price, then what is left at the end?” he told the Financial Times.
That the code has encouraged M&A activity in Japan is undeniable. However, are all these deals having the intended effect? The 10-year mark might be a good time to examine that.
The language in media reporting around Tokyo’s boardrooms tends to be similar: Management are “laggards” that need “shaking up.” However, I do not hew to the heuristic that being more like Western boards is intrinsically positive.
Back when businessman Elon Musk was still more known for his corporate activities than his political involvement, he once decried the “MBA-ization of America,” whose boards he said were stacked with too many financiers and too few engineers. While Japanese boards have only improved since the code was introduced, the country should be wary of going down the same path.
Many of Japan’s most iconic companies got where they are by ignoring the herd. Stacking boards with external directors seemingly does not stop firms such as Warner Bros Discovery (with more than 90 percent of the board independent of the firm) from making silly decisions such as changing the name of HBO Max back and forth — and paying the CEO more than US$50 million for the privilege. The kind of corporate busy work of merging and splitting companies that Warner is engaged in is a prime example of the “short-termism” that can dominate boardrooms without contributing anything to society.
The code has certainly set companies to thinking about how to utilize their cash — one thing that is so appealing to activists, many of whom are prodding boards to return those reserves to investors in the form of buybacks and dividends.
Bloomberg Intelligence analyst Yasutake Homma said that campaigns in Japan have nearly tripled over the past five years, with the 151 last year the most of any country outside the US. Another 87 campaigns have been launched in the first five months of this year.
A major goal of the code was to encourage companies to increase investment, wages and returns to shareholders, then-Japanese Minister of Finance Taro Aso said in 2018.
That last target is being met, but what of the other two? There is certainly lots of excess cash to “unlock.” However, let us not forget that having these deep reserves helped Japan weather previous crises, from the 2011 earthquake to the COVID-19 pandemic. That Japanese firms are well prepared for shocks is perhaps one reason we do not see more cases such as Marelli Holdings Co, the auto-parts supplier formed by KKR & Co from the merger of Calsonic Kansei and Magneti Marelli. Having taken on significant debt to buy Magneti Marelli in 2019, the combined firm struggled and filed this month for bankruptcy, threatening about 45,000 jobs.
It would also be nice to see encouragement of the real consolidation that Japan needs: Japan probably does not need seven listed automakers and three listed beer companies (soon to be four!)
The corporate governance code has done great work in promoting Japanese equities, but the country’s companies were often already doing better than was recognized. This new era makes for exciting headlines. However, it should not become a clearance sale.
Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia, and was the Tokyo deputy bureau chief.
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