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For decades, the shareholder meetings of Japanese companies were subdued affairs—swift, quiet ceremonies endorsing the status quo. The goal was harmony, not debate.

Now the silence is being shattered. A new breed of shareholder, often wielding significant foreign capital and sharp critiques, is demanding change. Known locally as “opinionated shareholders,” these activists are no longer confined to targeting small or midsize firms; they are increasingly setting their sights on Japan’s industrial pillars. And one industry particularly feeling the heat is chemicals.

Hong Kong’s Oasis Management, the UK’s Silchester International Investors, and other activist investors, many from outside Japan, are challenging the status quo at established chemical makers such as Kao, DIC, Tosoh, Daicel, and Nippon Kayaku. They argue that these companies possess potential that is obscured by inefficient operations, poor capital allocation, and a reluctance to make tough decisions—weaknesses they believe are reflected in lagging profitability and share prices. The era of quiet acquiescence in Japanese boardrooms is over.

Driving this new activism is a potent mix: concern about Japan’s undervalued stock market, particularly within the capital-intensive chemical sector, is converging with reforms spearheaded by the Tokyo Stock Exchange and the Japanese government to create fertile ground for investors demanding higher returns and strategic clarity.

IR Japan Holdings, an investor relations firm, reports approximately 70 foreign activist companies operating in Japan as of late 2023. Overall, “Japan is the second-largest activist nation after the US,” says Masatoshi Kikuchi, chief equity strategist at Mizuho Securities with expertise in activist trends.

Japan has had periods of investor activism, but the nature of the activism has evolved. “Unlike the old activism, modern activism is based on the premise that other institutional investors will provide support, and it targets companies with large market capitalizations,” Kikuchi explains in an invitation to a seminar.

Activists are drawn to specific vulnerabilities. “Companies with low price-to-book value ratios [PBRs], low return on equity [ROE], large cross-shareholdings, and high cash and equity ratios are easy targets,” Kikuchi tells C&EN. A PBR below 1.0, indicating that the market values the company at less than the value of its net assets, is a red flag. “In the US, companies with PBR below 1.0 are subject to the dismissal of their top management or are subject to takeover bids,” Kikuchi notes, suggesting that Japanese management has been too complacent.

This complacency shows up in comparisons of US and Japanese stock markets. While the number of listed companies is comparable (around 5,000 in the US vs. 3,800 in Japan), the market value of the US firms is eight times as great, and the ROE of the US firms is more than twice as high.

Concern in Japan about the competitive gap is not new. More than 10 years ago, the then prime minister Shinzo Abe proposed sweeping corporate governance reforms. The Tokyo Stock Exchange followed in 2015 with a corporate governance code that targeted core issues like a paucity of independent directors and the practice of cross-shareholding—arrangements in which companies hold each other’s shares as a takeover defense but which can stifle shareholder oversight and depress ROE.

The Tokyo Stock Exchange now urges companies to justify any significant cross-shareholdings or reduce them. This regulatory pressure has yielded results: findings from the Daiwa Institute of Research shows the average number of cross-shareholdings per listed company fell from 76.3 in 2018 to 64.3 in 2022.

“As it is said that the biggest activist in Japan is the Tokyo Stock Exchange,” Kikuchi says, “the introduction of the corporate governance code, stewardship emphasis, focus on PBR and ROE, and elimination of cross-shareholdings have made it easier for activists, including those from overseas, to gather stocks and increase their activities.”

Japanese companies have shown some improvement. The average ROE for listed firms has risen to about 9% from 5% before the governance code, and companies in Prime Market, the top tier of the Tokyo Stock Exchange, hit record profits in the 2024 fiscal year.

But activists and analysts argue that more corporate scrutiny is needed. “Listed Japanese chemical companies are undervalued, and they have a lot of room for earnings growth if they make improvements,” asserts Seth Fischer, chief investment officer at Oasis. “There are many attractive companies whose appeal is not fully reflected in their profitability or share price.”

Despite his optimism, Fischer has strong words for the Japanese chemical industry. “Chemical companies have a shrinking market and a glaring excess of supply capacity,” he says. “They need to urgently close, sell, or consolidate businesses.”

Fischer acknowledges that Japanese chemical companies have globally leading businesses in areas like semiconductor materials, but other divisions drag down overall performance. “Directors need stronger oversight,” he says. “Companies must ensure all businesses are profitable for medium- to long-term sustainability. We see great potential and great room for improvement.” 

And regardless of the industry, the differences between Japanese companies and their Western counterparts remain large, Fischer adds. “Japanese companies often produce well-crafted medium-term management plans, but they’re not good at quickly spinning off loss-making businesses. We have investments in Europe and the US, but in those markets, we rarely propose Western companies liquidate unprofitable businesses. That’s because they act before we say anything. Japanese management teams often continue to hold onto nonperforming assets. They haven’t fully come to terms with these financial realities.”

Oasis’s campaigns against Kao and DIC exemplify this activist push. Kao is best known for consumer products like the skincare line Bioré, though chemicals account for about 22% of its sales. In its “A Better Kao” campaign, Oasis argues that Kao missed significant growth in the booming cosmetics market because of underdeveloped e-commerce and international supply chains.

At Kao’s annual meeting in March, Oasis, which owns about 5.2% of Kao’s outstanding shares, proposed electing outside directors and revising executive pay to link it more tightly to performance. The Oasis campaign website highlights Kao’s lagging stock performance versus that of competitors, blaming passive global expansion, unclear marketing, weak distribution, and a bloated brand portfolio. Shareholders rejected Oasis’s proposals.

At the specialty chemical maker DIC, where Oasis holds over 11% of outstanding shares, the firm demanded “prompt improvement of loss-making businesses” acquired by the company and criticized governance, notably pushing for the sale of DIC’s significant art collection. While DIC shareholders also rejected Oasis’s proposals at their March annual meeting, the company later announced plans to reduce the artworks displayed in its museum to a quarter of the current offering and relocate it from Sakura City to the International House of Japan in Tokyo.

Oasis’s limited success in spurring change at Kao and DIC is not unusual. While activist investors are prevalent in Japan these days, other shareholders are often happy with the status quo.

Hibiki Path Advisors is a Singapore-based activist that is the largest shareholder in the plating chemical maker Japan Pure Chemical, holding an 18% stake. It opposed six nominees to the company’s board at its annual meeting on June 20 and made several shareholder proposals. Hibiki faults a former executive and current board member, Masao Watanabe, for continuing to have influence on the company and being the cause of its failure to generate value.

At the meeting, shareholders approved none of Hibiki’s proposals. In fact, Japan Pure Chemical shareholders have been rejecting Hibiki’s proposals since 2018, according to a Hibiki press release.

Despite the resistance of company management to activist investors, Kikuchi urges a proactive stance. “It is important to look at your company’s management from an activist’s perspective,” he says. “Review your capital structure, business portfolio, operations, and management structure without being bound by precedent.”

In his book The Identity of Activists, Kikuchi quotes from CFO Thoughts, a book that was written by Muneaki Tokunari when he was chief financial officer of the camera maker Nikon. Tokunari writes: “Among shareholders and investors, interacting with activist funds, which are the fullest of animal spirits and retain the ‘wild’ side of capitalism, is the most exciting and rewarding work.”

Whether Japan’s chemical giants embrace this challenging engagement to forge tougher, more globally competitive management remains the critical question. The activists, backed by Tokyo Stock Exchange reforms and market realities, show no sign of backing down.

Katsumori Matsuoka is a freelance writer based in Japan.