On June 16th, Yuya Shimizu, CIO of Hibiki Path Advisors (“Hibiki”) attended the annual shareholders’ meeting of Japan Exchange Group Inc (“JPX”).
Since sending an open letter to the JPX-affiliated Tokyo Stock Exchange Inc. (“TSE”) last July, Hibiki has met with TSE executives several times to exchange opinions. We were positively surprised by the content of the paper released by the TSE on 30th January this year titled “Summary of Discussions on Measures to Improve the Effectiveness of the Market Restructuring”, which raised awareness of the listed companies regarding their stock price.
The TSE subsequently released additional detailed materials on March 31st and April 25th giving a signal to the market that the TSE is actually SERIOUS to follow up and shocked the management of many listed companies. Until now, many shareholders, regardless of whether they are activist investors or not, have made earnest appeals to their investees to manage their companies with an eye on the stock price. However, these companies have always responded with mediocre responses such as “The market will decide the stock price” without performing any action to manage their stock price. Considering the current environment, such an attitude is no longer acceptable.
At the JPX shareholder’s meeting, Hibiki’s Shimizu asked the following question (summary):
“As an engagement investor, I was very encouraged and impressed by the fact that JPX has taken the initiative to notify listed companies to be conscious of their cost of capital and stock prices. The market has responded favorably, and foreign investors are watching the Japanese market with unprecedented enthusiasm. However, this is also déjà vu in a sense. The late former Prime Minister Abe’s Abenomics brought Japan into the spotlight, and at one-point foreigners bought more than 30 trillion yen of Japanese stocks, but over the following 7-8 years, they sold almost all of them. Now we are in a festive mood in a sense, but temporary and superficial responses such as share buybacks and increased dividends are getting more and more commonplace. I feel that this may be Japan’s last chance to revive itself and I believe that strong, continuous measures are needed to bring Japanese companies as a whole to a more structurally capital-retaining profitable state, rather than let this trend be a one-hit-wonder. I would like to hear CEO Yamaji himself on what additional measures the TSE and JPX are considering in the future.”
CEO Yamaji’s response is as follows (summary):
“Since the announcement in January, we have received a variety of comments and have been in dialogue with investors and issuers. As you correctly mentioned, in our additional presentation material, we clearly say that share buybacks and dividend increases are great first steps BUT also a mere superficial actions as well. We believe that it is important for companies to correctly recognize the cost of capital and enhance the return on capital and manage their businesses with an awareness of stock prices, and we will continue to monitor future trends. We have finished notifying companies in April and we expect to receive their responses by July. Companies would also likely include their actions in the corporate governance reports and other documents, which we will compile and analyze to determine what measures and advice we can offer.”
As you can see, CEO Yamaji has responded with a strong statement, showing its intent to take additional measures while conducting a detailed analysis of responses from companies so that this series of events would not end as a one-time event. As an investor, we would like to continue engaging in constructive dialogue with our investee companies to make such moves meaningful.
It may be difficult for a single company or individual to be aware of the large impacts on the economy, but if each one of us is serious about it, the “invisible hand of God” can boost the entire ecosystem and increase the overall wealth of Japan. The people who will break out in “cold sweat” the most are probably mediocre management teams who have been following precedents, not taking risks, and half-heartedly managing their businesses. We believe that this push from TSE will expose managers who have been unable to increase profitability, raise employee salaries and make investments but have simply hoarded cash and real estate in their companies, hiding in a corner and keeping a low profile with a P/B ratio of less than 1x.
In response to another shareholder’s question, CEO Yamaji said, “Stock exchanges are now in severe competition of winning investment capital around the world, and we need to win it.”
We are in full agreement with him. In order to achieve this, it is essential for exchanges to provide fail-safe strong technology for investors, but it is also essential to have companies listed there to be attractive enough to win capital.
The Chinese saying goes [流水不垢 戸枢不腐] – directly translated means
Flowing water is never stale, and a moving door hinge never gets rusty
meaning constant dynamism washes away dirt and prevents decay.
We sincerely hope that this phrase, written in the Chinese book of the state of Lu “The Spring and Autumn Annals”, will symbolize the revival of the Japanese capital market.
This document does not constitute a solicitation to subscribe for, or a recommendation to buy or sell, any specific securities, nor does it constitute investment, legal, tax, accounting, or other advice.