Investor group says Japanese firms' strategic shareholdings 'should be in principle zero'

TOKYO, April 26 (Reuters) - Japanese firms should reduce their "strategic shareholdings" to improve resource allocation, which is key to Japan's economic revival, the Asian Corporate Governance Association (ACGA) said.

Strategic shareholdings, which include allegiant and cross-shareholdings, serve to form business relationships between group companies and their suppliers and customers, but reduce capital efficiency, allow for persistently poor financial performance and harm competitive behaviour, the ACGA said in an open letter published on Friday.

The association, whose membership comprises institutional investors globally, said it was issuing the letter to "underscore the need to accelerate the further reduction of these shareholdings, which we believe in principle should be zero for most companies."

Signatories include representatives of asset management firm Neuberger Berman, Hong Kong-based activist investor Oasis Management and Japan's Pension Fund Association.

The Tokyo Stock Exchange and Japanese government have both sought to encourage firms to improve their corporate governance and capital allocation over the past decade and Japanese firms have begun to unwind their strategic shareholdings.

On average these shareholdings made up 8.4% of Topix 500 companies' net assets in 2023, according to securities reports data cited in the letter, down from 13.5% in 2015.

The ACGA recommends a general policy of no strategic shareholdings.

To expedite the process in Japan, it has called for more extensive disclosure on strategic shareholdings.

For companies with "significant" strategic shareholdings of, for instance, more than 5% of net assets, the ACGA proposed the formation of a special committee made up of independent directors and auditors to oversee the divestment strategy and execution.

The ACGA previously released an open letter on gender diversity on Japanese companies' boards, calling for women to make up 30% of boardroom positions at all firms listed on the TSE Prime market by 2030.

(Reporting by Anton Bridge; editing by David Evans)