Nearly 70% of the companies listed on the Tokyo Stock Exchange’s Prime market are planning to reduce their holdings of cross-held shares, according to recent industry data. A survey by auditing firm KPMG AZSA revealed that 1,095 out of 1,650 Prime companies have committed to cutting these shares as of March 2023, marking a significant increase from the 793 businesses that sold cross-held shares throughout 2023.
Cross-held shares, or strategically held shares, are equities that companies mutually own to reinforce business relationships rather than generate investment returns. While these arrangements have traditionally created stable shareholder networks, they have faced criticism for encouraging lax corporate discipline and reducing market pressure on management.
The practice of cross-shareholdings has seen a resurgence after a period of decline, but many companies are now reversing this trend. NTT, Japan’s largest telecommunications group, stated that it does not intend to hold shares for creating stable shareholders, exemplifying this shift. Similarly, trading house Itochu has committed to divesting investments that do not add economic value within two years.
Approximately 90 companies have set specific goals for reducing cross-held shares, with estimates suggesting that around 4.7 trillion yen ($30.2 billion) worth of shares could be sold off if these plans are followed. Prominent examples include the Toyota group, with auto suppliers Aisin and Jtekt aiming to eliminate cross-shareholdings, and non-life insurance companies also reducing their stakes.
Companies like Sumitomo Realty & Development and Dai Nippon Printing are among those targeting a reduction in cross-held shares to 10% of net assets. Sumitomo aims to achieve this by March 2028, while Dai Nippon plans a similar reduction from 20% of net assets.
Several companies have already started selling off cross-held shares. H2O Retailing sold part of its stake in Toho in April, expecting a gain of 14.2 billion yen, and Mitsubishi Logistics plans to sell shares in four companies by September, with an anticipated gain of 11.5 billion yen. The current stock rally has facilitated these sales, allowing companies to capitalize on market gains.
The Tokyo Stock Exchange has been a driving force behind this movement, urging companies to adopt practices that improve shareholder returns and equity values. Strategically held shares have been identified as a factor lowering capital efficiency among Japanese corporations compared to Western counterparts.
KPMG AZSA’s analysis shows that companies with high levels of cross-held shares typically have lower price-to-book ratios and returns on equity. Proxy advisory firms are increasingly recommending that investors vote against shareholder proposals from companies with substantial cross-held shares, further pressuring businesses to divest.
The use of proceeds from these sales will be a critical area of scrutiny. “The judgment of management will face scrutiny based on which areas they invest sales proceeds,” said Daisuke Tsuchiya of KPMG AZSA, indicating that investors will become more discerning about the strategic allocation of funds from these divestments.
