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Business trends

Governance demands chip away at Japanese cross-shareholdings

Fujitsu shed $444m in 'meaningless' stakes in fiscal 2018 with more to come

Fujitsu's reduced cross-shareholdings show how the practice has lost favor in Japan.

TOKYO -- Corporate Japan is steadily unwinding cross-shareholdings and other strategic capital arrangements as the growing power of foreign investors puts more pressure on companies to follow good governance practices.

Fujitsu sold 48.2 billion yen ($444 million) in cross-held shares of 85 companies, including KDDI and Mizuho Financial Group, in the fiscal year ended this March, according to a Nikkei examination of securities reports through June 28.

"Cross-shareholdings are meaningless," said Hidehiro Tsukano, a former Fujitsu vice president and chief financial officer who now serves as an executive officer.

"We plan to continue reducing them going forward," he said.

Fujitsu's cuts show the degree to which the practice of companies holding minority stakes in each other to promote closer business relationships, once ubiquitous in Japan, has fallen out of favor. The share of Japanese stocks' market capitalization bound up in cross-shareholdings fell to 9% in fiscal 2017, dropping below 10% for the first time, according to the Nomura Institute of Capital Markets Research.

Trading houses have cut back on such "strategic" stakes. Mitsubishi Corp. cut its interest in Yokohama Rubber and six other companies by 82.3 billion yen last fiscal year, bringing the total book value of its strategic holdings to 637.3 billion yen. Mitsui & Co.'s cross-shareholdings fell by 26.3 billion yen, with Nippon Steel Trading among the 11 companies affected.

The trend has also taken off among drugmakers. Ono Pharmaceutical pruned its many cross-shareholding relationships with companies based around its home city of Osaka, particularly those with little bearing on its core business, such as homebuilder Daiwa House Industry and measurement equipment maker Horiba. Its sales of cross-held shares in fiscal 2018 totaled 14.9 billion yen.

Pharmaceutical peer Eisai cut capital ties with such companies as convenience store operator Seven & i Holdings that had been intended to support its operations in over-the-counter drugs.

Tougher governance requirements have played a central role in the drop in strategic holdings. Japan's revised corporate governance code that took effect last year urges businesses to provide policies on reducing such arrangements. It also bars companies from hindering partners from selling cross-held shares "by, for instance, implying a possible reduction of business transactions."

The government has also tightened its disclosure rules. Starting this year, securities reports must include the 60 largest stakes a company holds, up from 30 previously, as well as state whether any of these are cross-shareholdings.

The drop in strategic holdings has, in turn, made more room for investors willing to use their voting rights to exert pressure on management. The proportion of Japanese shares held by domestic companies dropped to 21.7% in fiscal 2018 from 30.1% in fiscal 1990, while the share owned by foreign investors surged over the same period to 29.1% from 4.7%.

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