Activism Unleashed: Capitalizing on Japan's Governance Reforms in Undervalued Firms

The 2024 Annual General Meeting (AGM) season in Japan marked a turning point for shareholder activism, as institutional investors increasingly flexed their muscles to demand governance reforms and capital returns. With shareholder proposals hitting a record 385 across 91 companies—and support levels climbing even when votes were narrowly lost—the era of passive management is fading. For investors, this shift presents a golden opportunity to target undervalued firms where activism is unlocking hidden value.

The Surge in Shareholder Proposals: A New Era of Accountability

The data speaks volumes: the number of shareholder proposals has surged 63% since 2021, with director elections and dividend policies dominating the agenda. . While outright victories remain elusive (only four proposals passed with over 50% support), the rising tide of support—even for failed proposals—signals a seismic shift in shareholder power. For instance, proposals for board changes garnered 97 instances in 2024, up from 58 in 2023, reflecting investors' growing impatience with underperforming leadership.

Institutional Investors: The New Powerbrokers

Activist funds like Strategic Capital and UGS Asset Management are rewriting the playbook. Take Daidoh Limited, where Strategic Capital secured three board seats with 51-52% support after a years-long campaign. The result? Immediate reforms: Daidoh hiked dividends and announced a ¥10 billion share buyback program. This isn't an isolated case: .

Similarly, UGS's push for a special dividend at Toyo Securities (57.3% support) forced leadership changes, with President Yoshiaki Kuwahara stepping down. These outcomes highlight a clear pattern: activism drives tangible change, even when proposals don't pass.

Strategic Opportunities: Where to Look

The key is to identify firms where activism is catalyzing reforms but hasn't yet been priced into the stock. Target sectors with weak ROE and poor capital allocation—like manufacturing and financial services—where activists are demanding dividends and buybacks.

1. Firms with Activist Traction but Undervalued Stocks

• SK Kaken: Asset Value Investors (AVI) pushed for a 50% dividend payout ratio, securing 31.68% support. With an ROE of just 5.2% (vs. industry average 8.5%), this chemical company is ripe for turnaround. .
• Bunka Shutter: Strategic Capital's 100% payout ratio proposal (26.14% support) signals investor frustration. Its stock trades at 10.5x P/E, below its 12-year average of 14x—a bargain if reforms boost returns.

2. Companies Embroiled in Scandals with Governance Overhauls

• Hankyu Hanshin: After CEO Kazuo Sumi's reappointment garnered only 57.45% support, the firm replaced its audit committee and introduced stricter risk controls. The stock trades at 1.2x P/B, well below its five-year average of 1.6x.
• Sharp Corporation: Leadership changes post-activism and a new shareholder return plan could lift its undervalued stock (P/E of 8.2x).

3. The TSE's Role: A Tailwind for Activism

The Tokyo Stock Exchange's push for higher ROE and capital returns is aligning with activist demands. Over 60 companies increased dividends in 2024 despite profit declines, a sign that shareholder pressure is reshaping corporate priorities.

Risks and Considerations

While activism is a net positive, pitfalls exist. Environmental proposals continue to lag, with average support at just 20%, suggesting investors should prioritize governance over ESG in Japan for now. Additionally, supermajority voting requirements (like at Toyo Securities) can stymie progress unless activists build coalitions.

Investment Strategy: Act on Activism, Not Ambiguity

• Buy the dips in activist-targeted stocks with strong reform momentum (e.g., Daidoh, Toyo Securities).
• Avoid firms with poor governance unless activists are already engaged—they're the only catalyst for change.
• Focus on dividends and buybacks: Firms with activist-backed proposals for higher dividend-on-equity (DOE) ratios (e.g., TOA Road, SK Kaken) are likely to outperform.

Conclusion

Japan's corporate landscape is undergoing a quiet revolution. For investors, this isn't just about voting shares—it's about riding the wave of governance reforms to unlock undervalued firms. The playbook is clear: back activists driving accountability, prioritize balance-sheet fixes over ESG, and target sectors where shareholder pressure is highest. The next round of AGMs could be the proving ground for this strategy—and the rewards for those who act now could be historic.

Investment advice: Consider adding exposure to Japanese equities with activist involvement through ETFs like iShares MSCI Japan Small-Cap ETF (EWJY) or via direct holdings in companies like Daidoh Limited (Tokyo: 6306) and Toyo Securities (Tokyo: 8625).