Most Japan firms reluctant to unwind cross-shareholdings: Reuters poll

[TOKYO] Nearly 80 per cent of Japanese firms with cross-shareholdings do not plan to sell them this year, arguing they are important for business ties, a Reuters poll showed, which suggests a long haul for government efforts to improve corporate governance by encouraging such sales.

A new governance code in effect from this month requires firms to explain to investors their rationale for keeping cross-held shares, which the government of Prime Minister Shinzo Abe blames for thwarting accountability and transparency.

But survey responses showed that many firms see them as indispensable to cementing business ties in Japan and feel it would be difficult to refuse a request for such a partnership. "Although it seems irrational to foreign investors, we think of cross-shareholdings as a stable and effective means of strengthening business over the long term," wrote a manager at a chemical company.

The Reuters Corporate Survey, conducted June 2-15, found that 61 per cent of all Japanese firms own cross-shareholdings, with the ratio higher among manufacturers at 72 per cent and lower among non-manufacturers at 49 per cent.

Across all industries, 79 per cent of firms said they had no plans to sell while 19 per cent said they may sell some. The rest said they may sell a large part or all of the holdings.

Japanese firms have been gradually reducing their cross-shareholdings over the years, encouraged by a surging stock market since Abe returned to power in late 2012. But this has been largely led by financial firms and has yet to gain acceptance among non-financials, analysts say.

Their reluctance to part with secure, friendly shareholders is not surprising, given rising worries about activist investors, said Kenji Shiomura, a senior strategist at Daiwa Securities, who reviewed the results of the survey. "At a time when institutional investors are more actively exercising their voting rights and becoming more vocal, companies are unlikely to let go of stable shareholders of their own accord," he said.

Some 480 big and medium-sized firms were polled in the survey, which was conducted for Reuters by Nikkei Research. Managers respond anonymously and about 250 companies answered questions on cross-shareholdings.

Reducing cross-shareholdings could also help companies to improve asset efficiency as they look to lift return on equity - another area where Abe's government is seeking improvement.

The international standard for ROE - which measures how efficient companies are at generating earnings from shareholder equity - is widely seen as at least 10 per cent. In the United States, the level is well over 15 per cent.

By comparison, analysts estimate the average at Japanese firms last year at about 8 per cent.

The survey found that 68 per cent of firms believe their ROE to be below the international standard. Twenty-four percent see their ROE as on par while 8 per cent believe their ROE to exceed the international standard.

REUTERS