Trust Banks as Active Investors? An Analysis of Japan's Changing Shareholder Composition and Corporate Governance System

Date July 23, 2015
Speaker Ulrike SCHAEDE (Professor of Japanese Business, University of California, San Diego)
Moderator OKINA Yuri (Vice Chairman of the Institute, The Japan Research Institute, Limited)


Ulrike SCHAEDE's Photo


In my paper, "corporate governance" is defined as the systems and processes by which management is monitored so that it cannot abuse its information advantages. Two main mechanisms exist: the board of directors, and the market. Japan has recently undergone great changes in the first category. In my paper, we look at the "market" mechanism, in particular, the behavior of a new group of institutional investors that is generally referred to as "trust banks." According to the Tokyo Stock Exchange (TSE) annual shareholder survey, as of March 2014, approximately 32% of shares were owned by "foreigners" and 18% by these "trust banks." That adds up to half of all shares. Does the "trust bank" category invest in ways that represent corporate governance pressures on management?

The "trust bank" category includes asset management companies, or so-called "re-trusts" (saishintaku), pension funds, investment funds, and Japan's big four trust banks. The null hypothesis in my paper is that this category of investors does not invest in significantly different ways, i.e., they invest with the stock market index. We use Nikkei NEEDS financial data for 1995-2012 to connect shareholder data with performance indicators. Unfortunately, for the trust bank category, these data are limited to the "investment trust" (tōshi shintaku) portion.

In the first step, we look at univariate differences along a number of company and accounting data, ranging from size, age, profitability, debt levels, and efficiency measures (cost over revenues) to growth indicators for the previous five years. We find that companies and financial institutions (including life insurance companies) invest in firms that are older, larger, less profitable, and less efficient. One possible explanation for this seemingly strange behavior is that companies hold large ownership shares in subsidiaries, while life insurance companies own other companies for mutual trade assurance.

In stark contrast, the categories "foreign" and "investment trust" show significant differences from zero in almost all categories, and the coefficients are larger for the trust; namely, these two categories invest in companies that are much more profitable, more efficient, have lower levels of debt, and show higher growth over the previous five years. The null hypothesis is clearly rejected. These are not indexed investments. Finally, we look at multivariate effects, and find that return on assets is a consistent marker: investment trust ownership stakes are significantly higher in companies with higher profitability. We conclude that Japan's stock market is beginning to exert discipline on senior management, as owners in the "trust bank" category are not simply index investors.


Q1. Nikkei NEEDS data: trust bank holdings are included in the financial institutions category, so the investment trust section only covers investment trusts—tōshi shintaku—not managed by trust banks. They are just custodians. Your data show that the third largest shareholder for 1995 is Mitsubishi Trust Bank, but this should be composed of three categories. Also, saishintaku is different from the Master Trust Bank and other custodial investments.

I take your explanation to mean that the tōshi shintaku included in the data are not associated with the trust banks, making the title of the paper erroneous. I am not sure that is the case, but I agree that perhaps the TSE (and our general) category title for these investors should be "asset management firms," not "trust banks."

Q2. Regarding the recent Toshiba Corporation's accounting scandal, how would the sokaiya react?

I don't know the answer to that particular question. I've been looking at corporate governance for many years in different countries. I've come away with the impression that there is no system that will prevent cheating. The Toshiba case does not appear to be a systemic problem so much than that of an individual company with serious management issues. It will be very interesting when we learn more.

Q3-1. I have three questions. First, investment funds and pension funds are included, but it seems you excluded pension funds. Why? Second, a substantial part of your presentation was multivariate regression. Which is the main path for interpreting these results? Is it influence or selection, when you find a correlation between investment trust shareholding and corporate performance? Third, if we accept the estimation results of the disciplinary effect, what is the path or mechanism by which investment trusts influence corporate behavior, resulting in higher performance, growth, or other factors?

I've been told that many of the pension funds are indexed, so I agree with you that we are eager to know more about them. I will work on that going forward. Your next question relates to causality, which is very difficult to tease out. In my paper, I am rather modest about what I want to accomplish, which is to reject the null hypothesis (i.e., show that there is a pattern). But, why are high bank, insurance company, and company holdings associated with less profitable, higher debt companies? And, are the companies with high foreign and investment fund ownership more profitable because of their owners' influence, or is the other way around: foreigners and investment funds invest in companies that are more profitable? I suspect the reason we have a hard time testing this out is that it differs on a case-by-case basis, and both can occur.

Finally, your last question on the governance mechanism: the easiest and best defense against a hostile takeover is to run the company very well, so that the stock price stays at a high level. This governance mechanism works invisibly, by invoking preemptive "excellent management" defense. In other words, the market exerts pressure on management simply by its existence. And Japan now has this market. It's invisible and immeasurable, and it will make Japanese companies better over time.

Q3-2. I agree with what you are saying. However, your main message is that people conceive some kinds of activities or hostile takeovers to be the main drivers of the market for corporate control. When you say that a market for corporate control has appeared in Japan, while it can be described as a market for corporate control, the form it takes in Japan is slightly different. The impact of changes in stock prices has become a very important factor for corporate managers. Stock prices are affected by investment fund behavior.

Q4. Recently, our fund has been trying to cooperate with one of the largest Japanese trust banks to encourage greater engagement or more effective dialogue with companies, but we are just at the starting point. What kind of collaboration or relationships can we build in the future?

I don't have a good answer for you, but I have a forward-looking idea for the industry as a whole. In general, you have to wonder what trust banks in Japan do, and what their business model is. If I were the CEO of a trust bank in Japan, what would I do to grow, to become more influential, and profitable, etc.? I might try to reach out into these new markets where I start working with activist funds or other new types of investors so that I could escape my role as just one of these banks lumped in one large category that few people understand.

*This summary was compiled by RIETI Editorial staff.