Summary
Japan is entering a transformative phase regarding cross-shareholdings as significant corporate governance reforms take effect. The recent modifications to Japan’s Corporate Governance Code have initiated a substantial unwinding of these cross-shareholdings, which is anticipated to cultivate more dynamic interactions among business partners. According to the Nomura Capital Market Research Institute, cross-shareholdings reached a low of 30.8% by the end of March 2024, as evidenced by ongoing evaluations of the stockholding structure within Japan. The assessment is based on the yearly “Stock Distribution Survey” by Japan’s four major stock exchanges—Tokyo, Nagoya, Sapporo, and Fukuoka—alongside their respective securities reports. Shares owned by foreign entities, individuals, and trust banks are categorized as “net investments,” whereas those held by local banks, insurance firms, and corporate businesses are classified as “strategic holdings.” Notably, the net investment ratio increased from 68.5% in fiscal 2022 to 69.2% in fiscal 2023, contrasting with a drop in strategic holdings from 31.5% to 30.8%. An inspection of the strategic holdings of listed companies reveals that 207 non-financial companies recorded a decrease in their holdings by ¥2.5 trillion ($17.6 billion), alongside a reduction of ¥1.8 trillion among the 24 financial institutions, summing up to a total net decrease of ¥4.3 trillion. A more granular analysis shows that while non-financial holdings in listed stocks rose by ¥200 billion and financial holdings by ¥100 billion in fiscal 2023, overall, a reduction of ¥2.7 trillion and ¥2 trillion occurred in non-financial and financial holdings, respectively. The trend of diminishing cross-shareholdings is likely associated with the pressure to establish a threshold for shares held as a metric in the exercise of voting rights by institutional investors. Additionally, cross-shareholdings have been implicated in various corporate governance scandals involving non-life insurance companies. Per the Financial Accounting Standards Institute’s guidelines, companies can classify stocks as held for purposes beyond net investment at their discretion, raising potential concerns regarding transparency and disclosures. In light of the 2024 Action Program for Corporate Governance Reform released by the Financial Services Agency (FSA), there is a strong recommendation for companies and investors to rigorously reassess the rationale behind their shareholdings, focusing especially on the governance framework that dictates their voting rights and disclosure practices. Furthermore, the FSA aims to conduct an extensive survey of all listed companies to ensure compliance with these disclosures and to address any discrepancies that may arise. With these shifts, investors must remain vigilant against the risks of potential regulatory evasion, such as companies reclassifying strategic investments to inflate their net investment statuses deceptively. According to the FSA, clear guidelines regarding the rationale for reclassification and managing expectations of stock liquidation are essential for maintaining market integrity. As Japan steadily moves away from traditional cross-shareholding models, the landscape of corporate governance is set to evolve. The trend towards reduced cross-shareholdings may diminish the number of long-term, stable shareholders, and this cultural shift is expected to empower institutional investors with enhanced authority in corporate governance matters, leading to more active engagement and decision-making on shareholder proposals. Therefore, as the structure of shareholding transforms to favor net investors, a more animated and interactive relationship among businesses will emerge, offering greater accountability and agility in corporate governance.
Original Source: www.nomuraconnects.com
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