Nintendo Switch success drives governance questions

Nintendo’s share price is at a near-10 year high, topping ¥48,000 ($449) – but the company faces questions over its corporate governance.

The boost to the Kyoto, Japan-headquartered company’s stock comes off the back of the huge success of its Switch console, which has sold more than 12 mn units since its launch in March last year. But its success is pricing out many retail investors because of a minimum trading limit of 100 shares, with both CNBC and the Financial Times reporting that some investors are calling for a stock split to widen the shareholder base and aid governance.

The FT quotes Macquarie analyst David Gibson as saying a stock split would be ‘a good first step’ toward greater transparency, while on CNBC Atul Goyal of Jefferies discusses the governance implications of such a move.

According to data from Morningstar, the firm did split its stock once, in 1989, with a 3:2 ratio.

‘Nintendo is notorious for bad IR,’ Hitoshi Sugibuchi, representative director at governance and IR consultant Sessa Partners, tells IR Magazine. ‘Nintendo does not attend brokers’ conferences, doesn’t do overseas roadshows or even conference calls. It accepts meetings only with investors that come to its headquarters in Kyoto, and then with a limited time window.’

A request for comment from Nintendo was not returned within 24 hours. This article will be updated with comments if received.

There are signs the firm is becoming more transparent, however. In his most recent statement to shareholders, company president Tatsumi Kimishima announced plans to widen access to Nintendo’s intellectual property with plans for everything from gaming cards to theme parks and a new Mario film being made with Illumination Entertainment, the US film and animation studio behind Despicable Me.

‘Not many investors criticize Nintendo because of its unique business domain,’ Sugibuchi continues. ‘Although gaming is a large industry, the business culture and management style is quite different compared with other sectors. The drivers are creators and engineers whose incentives are interest and curiosity rather than money. Nintendo has created its own management way and operational policy, and many investors respect this even though some complain about poor disclosure.’

Governance review

Japan introduced a new corporate governance code in 2014, but there are concerns that governance has remained a box-ticking exercise at some firms. That said, Sugibuchi notes that 98 percent of the JPX-Nikkei 400 now has two or more outside directors, as required by the code. This is an increase from 21 percent before the code came into force.

Outside directors are not having the desired impact at Japanese companies in general. ‘High levels of retained cash in company balance sheets, low dividend-payout ratios and a slow pace on the unwinding of cross-shareholdings [where the company owns shares in a partner firm]’ are all adding to these concerns, Sugibuchi adds. ‘The first step in the introduction of outside directors is over,’ he says. ‘Our focus from now on is how outside directors work, monitoring the board and even confronting the CEO if necessary.’

Japan’s Financial Services Agency (FSA) is now preparing to revise and strengthen the existing code, which also allows companies to switch to a new governance structure by appointing statutory auditors as outside directors.

This is something Nintendo has taken advantage of, with all three of the firm’s outside directors having previously served as Nintendo auditors. Such individuals would not be considered independent directors in other jurisdictions, and their appointment is therefore unlikely to impress foreign investors. Sugibuchi notes that such moves are little reported on within Japan, partly because the practice is allowed under the code but also because, even in the media, there is ‘not a good understanding of corporate governance.’

The FSA is expected to publish its draft statement for changes to the code in June, with CEO performance, appointment and termination among other issues on the agenda. But Sugibuchi says it is companies’ philosophy that needs to change. ‘Traditionally, Japanese people respect seniority,’ he explains. ‘Thus, CEOs have strong leadership and board members will not strongly oppose them. But board members should understand that they work for the shareholders, not the CEO.’

The role of investors

As well as the introduction of the corporate governance code, 2014 also saw the FSA introduce a stewardship code to promote greater dialogue between investors and companies and push for governance reform – but again, progress has been slow.

‘There wasn’t much improvement in terms of the relationship between the buy side and companies in the first few years,’ Sugibuchi notes. In a renewed push last year, the government called on asset management firms to disclose their voting records at annual meetings, something the majority of asset management firms have now begun to do.

Japan’s Government Pension Investment Fund (GPIF) – the world’s largest pension fund with assets of around ¥162.67 tn as of September 2017 – has been increasingly focusing on governance. It does not invest directly in equities but via asset managers and ‘in order to improve productivity in the private sector, GPIF is demanding that asset managers build engagement with corporate management,’ says Sugibuchi. ‘It has a strong influence in the investment world, and its current focuses are corporate governance and ESG.’

In July 2017 MSCI launched two new ESG-focused indexes aimed at Japanese companies: the MSCI Japan Empowering Women Index and the MSCI Japan ESG Select Leaders Index, with the GPIF.

The country is also seeing a slight increase in shareholder activism, Sugibuchi adds. For example, GPIF has invested in Taiyo Pacific, a US activist fund targeting Japanese companies. Still, ‘Japanese institutional investors are reluctant to ally with aggressive foreign investors,’ Sugibuchi says, adding that if a campaign became a proxy fight at the AGM, ‘it seems unlikely minority shareholders could beat company management without teaming up with domestic investors.’

He says public campaigns are ­likely to have more of an impact as Japanese management values reputation.