Governance reform in Asia: Key conference takeaways
Diligent Market Intelligence (DMI) recently put itself at the center of the discussion about activism and governance reform in Asia, hosting panels on the topic in both New York and Tokyo. On February 25, DMI’s Stewardship Series conference in New York featured Haonan Wu, head of Asia stewardship at Federated Hermes; Alicia Ogawa, a director at Nippon Active Value Fund; and Elizabeth Ellicott, DMI’s head of activism research.
Just a week later, at ICGN’s 30th anniversary conference in Tokyo, I was joined on stage by prominent activists Seth Fischer of Oasis Management and Changhwan Lee of Align Partners, along with Nels Hansen, M&A partner at law firm White & Case, and Nana Li, head of Asia stewardship for Impax investments.
Both events, bringing together 450 investors, directors and advisors from around the world, were buzzing with talk of corporate governance reform and the growing role of shareholder activism in the region. Yet there were also calls for more action, especially in terms of director independence, along with concerns that regulators in the region might take steps to cool the activist trend.
What DMI learned
While the number of public campaigns in Asia declined slightly in 2024, after several years of sharp increase, the number of activists operating in Japan and the rest of Asia has exploded. In the words of one activist investor in Japan: "We’ll take a stake in a mid-cap company and find to our surprise that there’s already four other shareholder activists on the shareholder register. Even if we’re only owning 5% to 6%, we have a gang behind us.”
Not surprisingly, engagement between active shareholder and management has also reached new levels. Seth Fischer of Oasis described engagement in Japan as “deeper and broader” than ever before, noting that he recently had dinner with the CEO of Hitachi. "These are conversations you would never have had 10 years ago,” he stressed.
Most of that engagement is private. In fact, the quiet approach has become the preferred tactic of most activists operating in Japan and other Asian nations.
“We don’t want to shame companies,” one Japanese activist fund manager told DMI, arguing that public campaigns will foster opposition even among pro-change directors. Instead, he said the strategy is to identify a “pro change person on the board” whether it be a board member or a CEO, who can act as a sponsor. That tactic was echoed by another active investor in Japan who told DMI that the key was “to suss out who within the company was loyal to the CEO and who wasn’t and who among the domestic investors had an appetite for what we were trying to do.”
More to do
Despite the progress made to date, the events heard that more needs to be done in terms of board independence and qualifications.
While a great many listed companies in Japan and Korea agreed to governance improvements such as adding independent directors, there is “significant concern around that actually implementing,” noted one stewardship expert in New York. “We still see independent directors who have a relationship with the cross shareholdings and sits on the board.”
In terms of director qualifications, Seth Fischer said Japanese boards need to achieve what he called stage three. “Stage one was having the CEO’s lawyer and accountant on the board. Stage two are university professors. Stage three is having real directors with practical experience of running companies and dealing with the blocking tackling of running a business.”
There were also concerns among some who spoke to DMI that after years of welcoming activism, some Asian regulators may become more conservative, especially in terms of mergers and acquisitions.
Nels Hansen of White & Case stressed that Japan’s regulatory agencies "have a lot of people with a lot of different opinions." And while "there's a broad coalition of people in Japan who recognize it's important for us to be able to pay our pensions," there are also “regulatory sensitivities” that need to be considered.
One Japanese regulator who spoke with DMI indicated that the role of private equity in activist situations might face greater scrutiny. That warning comes amid a rising wave of privatizations by undervalued, under covered Japanese companies being bought out by PE firms, in many cases at the behest of an activist investor.
That view was echoed by a prominent activist investor, who told DMI: “I think there is going to be a blowback by the regulators because it's just too easy to buy a small company and say to the CEO - you do what we say or we're selling you off to KKR.”
The overriding majority of attendees who spoke with DMI in both Tokyo and New York expected activism to continue growing in Asia, especially outside Japan in markets like Korea. Despite recent political upheaval, Changwhan Lee of Align predicted that governance reforms in Seoul would accelerate this year, noting that both ruling and opposition parties in that nation have put forth measures to protect minority shareholders “The politicians are motivated to appease retail investors, so I think there's structural tailwind behind this,” he told DMI in Tokyo.
Looking across the region to markets like Hong Kong, Singapore and Taiwan, Nana Li predicted that “as the ownership structure becomes more and more dispersed, shareholder activism in Asia will have momentum.” Though due to still-concentrated ownership structures in many Asian companies, investors will have to use more creative ways to express their views, she cautioned.
