As more and more Japanese companies look to engage with the global investor community by upgrading their investor relations practices, the Edelman Trust Barometer Special Report on Institutional Investors, an expansion of the global Trust Barometer survey, provides some interesting insights for consideration.
Historically, Japanese company managements have long had a comfortable existence with their shareholder base: largely cross-shareholdings from other publicly-held business partners. Back in 1990, according to data from Nomura, cross-shareholdings (financial institutions and corporates) made up 50 percent of market value. Under pressure from the government, and, amongst others, activist investors, to unwind these holdings, as of early 2015, this had fallen to around 15 percent. Management was rarely held to account for failure to deliver a higher return on equity and these cross-shareholdings meant management had little incentive to explain strategy and other developments. Investor relations disclosures mirrored the Tokyo Stock Exchange disclosure forms (and many still do), which meant updating numbers in a template document. While this technically was acceptable from a disclosure standpoint, it may not have been enough from an investor relations best practice perspective. In fact, Edelman’s new research showed that nearly 60 percent of institutional investors in our survey believed that current disclosure requirements are not doing enough to maintain their trust.
As these cross-shareholdings are unwound and Japanese companies look to the international investment community to provide new sources of capital, our Special Report provides insights into what global investors expect of the public companies they invest in. Most interestingly, our survey found that institutional investors view themselves as agents of change. Eighty seven percent noted that they would support an activist investor if they believe change is necessary at a company they invest in. Not only are activists and international investors calling for action on cross-shareholding, and as importantly, outdated governance structures where boards largely consisted of internal directors which act as rubber stamps for the CEO, there are powerful forces in Japan looking for change too. In an April 2017 speech, Japan’s Financial Services Agency Minister Mori blasted portfolio managers in banks and insurance companies condemning “inactivist” fund managers for not holding management feet to the fire.
A survey by BNY Mellon* of international investor attitudes to Japanese companies conducted in 2016 noted that the introduction of new corporate governance and stewardship codes are key drivers to spur change, with 65 percent of those surveyed wanting an independent Board of Directors. Our survey supports the importance of the Board with 66 percent of institutional investors saying that they must trust a company’s Board of Directors before making or recommending an investment.
So, what can Japanese companies do as they upgrade their IR programs to attract international audiences? Investors stated eight key actions that impact trust in companies they invest positively:
At the end of the day, 82 percent of investors we surveyed noted that “trust in the company” was the most important driver of investment decisions. Only 34 percent cited stock performance as an important consideration. Whilst there remains concern over governance at Japanese companies, there is a clear path forward in engaging with International Investors and wining their trust.
Deborah Hayden is director and lead, financial communications, Edelman Japan.
The Edelman Trust Barometer Special Report: Institutional Investors surveyed over 100 chief investment officers, portfolio managers and buy-side analysts in 14 countries whose firms manage more than $1 trillion in assets using various investment styles, including value, growth and growth at a reasonable price (GARP).