Large Shareholders, Shareholder Proposals, and Firm Performance: Evidence from Japan

• Author: Tsung‐ming Yeh
• Date: 01 July 2014
• Published date: 01 July 2014
• DOI: http://doi.org/10.1111/corg.12052

Large Shareholders, Shareholder Proposals, and

Firm Performance: Evidence from Japan

Tsung-ming Yeh*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Previous studies, primarily based on evidence from the United States, fail to link shareholder

activism to firm performance, with one explanatory factor being that the legal and regulatory system in the United States

limits the anti-director rights of shareholders. This study is motivated by the question of whether legally binding share-

holder resolutions can pressure management to improve firm performance and to enhance firm value.

Research Findings/Insights: By investigating 135 publicly listed Japanese firms which received shareholder resolutions

from 2004 to 2010, this study finds supportive evidence for shareholder proposals. Announcement-associated abnormal

returns are higher for firms receiving election-related proposals by large sponsors, than those unrelated to board election.

Furthermore, an improving trend begins to appear in the post-resolution year, particularly significant for firms receiving

proposals to remove board members.

Theoretical/Academic Implications: This study provides new evidence suggesting that large shareholder activism in

Corporate Japan can perform roles that used to be played by main banks before the 1990s. It also suggests that in countries

where there is no active takeover market, large shareholders can effectively discipline entrenched management through

active engagement.

Practitioner/Policy Implications: This study offers insights to corporate managers on the importance of communicating

with large shareholders and addressing their concerns.

Keywords: Corporate Governance, Large Shareholder, Shareholder Proposal, Shareholder Meeting

INTRODUCTION

Agency problems between managers and shareholders

invariably exist in the modern joint-stock company. The

objectives of corporate managers often conflict with those of

shareholders. Boards of directors have tended to go along

with management and to ignore the interests of the very

party they were created to protect (Jensen, 2000). In prin-

ciple, shareholders can express their dissatisfaction through

exercising “exit” or “voice” (Hirschman, 1970). The former

option takes the form of selling shares in the stock market,

while the latter involves active engagement with manage-

ment in the form of private negotiation or shareholder

proposals in shareholder meetings. This kind of active

engagement, however, may be circumvented by the free-

rider problem because the dispersed shareholders have little

incentive to take the trouble to take action. In fact, it is the

large shareholders who may have the greater incentive and

power to monitor management. In general, institutional

investors (such as funds) in the United States and United

Kingdom, and financial institutions (mainly banks) in Japan

and Germany, are playing a major role in monitoring firms

(Berglof, 1990).

At the same time, recent decades have seen an emerging

world-wide boom in shareholder activism, led by institu-

tional investors such as CalPERS and other investment

funds (Economist, 2004). Shareholder activism usually takes

the form of private intervention, active exercise of voting

rights, shareholder proposals, or proxy contests. Without

exception, Japanese firms have been targeted by these insti-

tutional investors due to perceptions of poor corporate gov-

ernance and disappointing performance (Jacoby, 2007). In

fact, this boom coincided with the weakening of Japanese

banks, which could no longer assume their role of monitor-

ing and bailing out their troubled client firms, as well as

with the collapse of cross-shareholding among industrial

*Address for correspondence: Akita International University, Global Business

Program, Yuwa, Akita-city, 010-1292 Japan. Tel: 81-(0)18-886-5953; Fax: 81-(0)18-886-

5953; E-mail: yosomei@aiu.ac.jp

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Corporate Governance: An International Review, 2014, 22(4): 312–329

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12052

firms. This coincidence of emerging shareholder activism

led by institutional investors and the decline of monitoring

power by the main banks in Japan provides a perfect setting

for the research question – can shareholder activism, led by

large institutional shareholders, prevail in an economy

whose corporate governance used to rely on banks? Such a

question has also been posed by both academics and prac-

titioners. Chung and Talaulicar (2010) point out the necessity

to explore the globalization effect of institutional activism in

non-US markets. Hirota and Miyajima(2001) argue that new

corporate governance is necessary to fill the void left by the

main banks.

This study investigates the events of shareholder propos-

als in publicly listed Japanese companies, contrasting those

sponsored by large shareholders with those by small indi-

vidual shareholders. Shareholder proposals can avoid some

of the data-gathering difficulties encountered in research on

other forms of shareholder activism. Information on share-

holder proposals is publicly and consistently available com-

pared with information on other forms of activism. Proxy

contests in corporate Japan are infrequent and do not suffice

for statistical analyses. Studies of shareholder activism in the

form of private negotiation also have a few difficulties. It is

hard to obtain information on private negotiations so the

sources rely mainly on press reports, the problem being

that only a small portion of such private negotiations are

reported in the press. Because of this, most studies use 13D

filings or equivalents as a proxy; however, 13D filing infor-

mation has its limitations. Casual observations find that the

stated objective in the documents may not be specific and

may be misguided. Furthermore, shareholder proposals

signal a clearer and more specific agenda, and also signal a

greater degree of commitment through the action being

taken. Investigation of shareholder proposals also has

several important implications, both academically and prac-

tically.

First, even though the legal rights for shareholder propos-

als have been in place since 1981, stipulated by the old Com-

mercial Code and the present Company Law, Japanese

management has typically gone out of its way to ensure that

shareholder meetings proceed peacefully and close quickly

(more details on this will be explained in a subsequent

section). Earlier shareholder proposals primarily involved

social issues, such as abolition of nuclear power plants, and

are usually sponsored by small individual activists. It was

not until the early 2000s that there emerged a change toward

more shareholder-value-orientedproposals, and a more pro-

active, engagement-minded, attitude amongst the institu-

tional investors (Seki, 2005). Since few empirical studies on

Japanese shareholder activism exist, this paper makes a con-

tribution by providing evidence on the effectiveness of this

newly emerging form of shareholder activism, the share-

holder proposal.1

Secondly, previous studies based on US evidence fail to

link activism to firm performance. One explanatory factor is

that the legal and regulatory system in the United States

limits the anti-director rights of shareholders. Activism in

the United States is often confined to public “naming and

shaming,” via focus list and filing non-binding shareholder

proposals in proxy statements (Becht, Franks, & Grant,2008).

Japan can be argued to provide a more friendly institutional

setting for shareholder activism, with more powerful legal

means than institutional investors possess in the United

States. This study explores the possibility that legally

binding shareholder proposals may have a strong effect on

management and firm performance. The next section pro-

vides an overview of shareholder rights, including share-

holder proposals, as well as the conduct of shareholder

meetings in Japan.

SHAREHOLDER MEETINGS AND

SHAREHOLDER RESOLUTIONS IN JAPAN

A fundamental difference between the US and Japaneselaws

is the ability of Japanese shareholders to initiate a change in

the basic contract by shareholder vote. In Japan, it is man-

datory that shareholders be able to change the charter or

articles of incorporation (teikan). In the United States, it is

mandatory that shareholders cannot initiate a change to the

company charter (Bebchuk, 2005). In other words, share-

holders in the United States cannot change the charter

without board removal while Japanese shareholders can

change the charter without the agreement of the board.

In Delaware, unless there are specific provisions within

the corporate charter to this effect, shareholders cannot call

extraordinary meetings, and therefore removing directors is

much more difficult. Shareholders in the United States can

ask the company to add proposals to the company proxy

under Securities and Exchange Commission rules, but this

excludes all issues relating to board elections. Furthermore,

proposals receiving a majority of votes under this rule are

not binding on the board.

By contrast, Japanese Company Law grants the right for

shareholders of a Public Company to demand that the board

call a shareholder meeting. A Public Company (kokai kaisha)

is defined as a company whose articles of incorporation do

not require the approval of the company for the transfer of

any share of one or more classes of stock of the company

(Company Law, Article 2). The listing of shares on an

exchange is not a requirement for being categorized as a

Public Company. To demand that the board call a sharehold-

ers’ meeting, qualified shareholders should have owned for

the preceding six months no less than three hundredths of

the voting shares (Article 297). In addition, (1) shareholders

may demand that directors include certain matters in the

purpose of the shareholders’ meeting; (2) shareholders may

submit proposals at the shareholders’ meeting with respect

to the matters that are the purpose of the shareholders’

meeting; and (3) shareholders may demand of the directors

that, no later than eight weeks prior to the day of the share-

holders’ meeting, shareholders be notified of the summary

of the proposals which the shareholders intend to submit

with respect to the matters that are the purpose of the share-

holders’ meeting.

The above shareholder rights only apply to those matters

on which such shareholders may exercise their votes. In

general, an ordinary resolution is required for matters relat-

ing to approval of financial statements, dividends, election

or removal of directors, and executive compensation. An

ordinary resolution is made by a majority vote of the attend-

ing shareholders at the meeting where the shareholders

SHAREHOLDER PROPOSALS AND FIRM PERFORMANCE 313

Volume 22 Number 4 July 2014© 2014 John Wiley & Sons Ltd