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The Folly of Coddling Shareholders

Ichiro Suzuki Shareholders are God in the 21st century capitalism. Management of Corporate Japan began to be told at the turn of the century. In a land of strong stakeholder capitalism traditions, they came to realize that their companies did not belong to them or their employees but to people who owned the shares of the companies. From a legal perspective, companies were not theirs. Management was elected by shareholders to run the companies on their behalf. In recognition of shareholders, Japanese companies began to increase dividends. When they made the decision to pay greater dividends, Corporate Japan was losing a luster of growth, slipping into a state of stagnant, low growth mode. The decision, therefore, made sense since low growth required less capital to be invested into expansion of businesses. Excess cash had better be returned to shareholders. Once known for skimpy payment of dividends, Corporate Japan boosted dividend yield to 2.2% today, for the Tokyo Stock Exchange Prime Market’s average, higher than the S&P500’s 1.8%. (Of course, the flip side of higher dividend yield is lower equity valuations for Corporate Japan that is not known for growth for a generation.) Then, corporate Japan started another services to shareholders. That is giving gifts to them. Airline companies, Japan Airlines and All Nippon Airways to be specific, had issued discount tickets for some time. With the arrival of shareholders capitalism in the 21st century, more companies started giving something to shareholders. Food makers not surprisingly started sending a box of their own products twice a year. Restaurant operators issued discount coupons that can be used at their outlets. Companies whose businesses don’t have much to do with consumer marketing started giving goods sourced from outside. For instance, a large bank gives a variety of Peter Rabbit goods, calendars diaries, towels, etc to shareholders in proportion to the number of shares they own. A brokerage house prepares a catalog of gifts, which contains a large number of items, mostly food items, that can be given to shareholders. Gift-giving’s popularity grew in the 2010s. Publishers issued weekly magazine’s special editions on how to live nicely off such gifts. A major brokerage house even ran a series of TV commercials to promote newly created tax-exempt investment scheme for retail investors, NISA or Nippon (Japan) individual savings account. One of the commercial series even said “investing through NISA might take you to a trip to the North Pole to see aurora.” This was at best an extreme exaggeration of what one might get hopefully, and most likely a flat lie. Given the size of NISA that allowed only ¥300,000 investments annually, less than $3,000, at that time, earning a free trip abroad on gifts was mathematically impossible for NISA account holders. Even worse, neither JAL or ANA issued free tickets to shareholders any longer by that time. What shareholders got at that time and still does today is 50% off full fare ticket prices. It’s a very good deal but still costs a fair amount of money for travelers. Amid rising popularity of gifts to shareholders, the ultimate purpose of investments came to be forgotten. Though generating returns through capital and income gains should take precedence over anything else to shareholders, this has been frequently blurred to retail investors in Japan. Value assigned to gifts can be estimated at one-tenth of a percentage point of their share prices. It’s not much but there are people who assign a greater psychological value in receiving physically visible gifts over an extra cent of dividend. Handling and shipping incurs some costs that otherwise should be in the hands of shareholders. When companies are taking advantage of gift-giving to get rid of inventories, it makes some sense. To some companies, however, gifts hit bottom lines in a visible fashion. McDonald’s Japan runs one of the most popular gift programs to shareholders, doling out vouchers that can be exchanged for set menus. At one point they found themselves to be overly generous, as the vouchers began to affect profit margins. The company still does it but at lower rates. Despite being less generous than before, popularity of McDonald’s Japan has not waned so much among retail investors who hold onto the shares for a long time. It’s so nice to have a legion of dedicated long-term fans. Here’s a catch, however. Shares of McDonald’s Japan are chronically overvalued, it is believed, thus alienating institutional investors. On the other hand, what’s in it for institutional investors? The answer is ‘absolutely nothing’. This is the ultimate folly of these practices of gift-giving to shareholders. There is no way that institutional investors are able to take advantage of McDonald’s vouchers, despite their growing presence in the market. Some of the gifts are probably sold to discount ticket shops for small prices. Shops resell them with thin margins. The majority of the gifts, however, is simply abandoned, to the detriment of institutional shareholders. However small opportunity losses might be, institutional shareholders are bluntly discriminated against retail counterparts. While there have been complaints from institutional investors, Corporate Japan has not been willing to cut back gift-giving to shareholders for fear of getting a bad press and being labeled as anti-shareholders. Then, JT (Japan Tobacco) has announced a year ago that 2022 was going to be the last year for the company to give out such gifts. With its dividend yield over 6%, JT is confident that shareholders stay with them without gifts. At present, they are in the process of sending out the last gifts to the shareholders registered at the end of 2022. It still remains to be seen if other companies follow JT in a meaningful fashion. Nonetheless, the first step has been taken. There used to be another small gifts to individual shareholders, and this has been discontinued. At annual general shareholders meetings, attendants received souvenirs on their way out, for the trouble of showing up. Such a souvenir was usually a small box of cookies or other types of confectionary that cost no more than 1,000 yen. Though management has been wanting to discontinue it, a risk of bad press has kept it going. Then the novel coronavirus has suddenly made it possible for them to stop it at once, as companies discouraged shareholders to come to the meeting amid the heightened health risk. While life is returning to normalcy slowly from three years of COVID-19 emergencies, gifts are unlikely to come back at shareholders meetings. The pandemic has brought a baby step to change the world for the better. Are greater changes in the pipeline? About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.



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