(July 9): A growing number of business leaders in Japan are pledging to unwind their vast network of cross-held shares to satisfy the nation’s top regulator and activist shareholders. Nobuhiro Doi isn’t one of them.

His Kyoto Financial Group Inc has amassed unrealised profits of more than US$6 billion on holdings in other firms and the company president said he plans to keep many of them, especially the biggest shares. The lender’s strategic holdings include the region’s global tech firms, such as video-game pioneer Nintendo Co, Ltd and motor-maker Nidec Corp.

In doing so, Doi, 68, is going up against a broader nationwide movement to overhaul corporate governance. Still, instead of caving in to pressure, Doi said he will step up his efforts to reach out to holders and explain the bank’s rationale for these strategic stakes.

“They are not simple cross-shareholdings. We invested in these companies since their foundation and most of them are expected to grow further,” Doi said in an interview with Bloomberg. “So, it’s better to keep investment in these excellent companies.” 

His outsized profits explain why. Many of the stocks were acquired decades ago when they were a lot cheaper, resulting in massive paper gains that now exceed ¥1 trillion (US$6.2 billion), according to Doi. That’s more than the firm’s own market capitalisation of about ¥834 billion.

“Is it such a bad thing to have big unrealised gains? I would like to seek understanding,” he said. “We have substantial shares in Nintendo and Kyocera Corp. If we say we will sell them all, it will disrupt the stock market.”

Kyoto Financial, founded in 1941, is based in the city that shares its name, which was the seat of Japan’s imperial court for much of the nation’s history. 

Banks and other companies with big strategic shareholdings have been under growing pressure to reduce them in recent years. Cross-shareholdings in Japan have been criticised for causing cozy relations between companies that stifle competition and innovation.

As shareholders became more vocal in expressing their complaints and wishes for management in recent years, Doi saw a shrinking number of votes supporting his re-election to the board, garnering only 62% of the ballots cast in last year’s annual general meeting. 

The bank attracted attention when Silchester International Investors made a shareholder proposal calling for special dividends in 2022 and 2023. Silchester said at the time that the bank should only sell its cross shareholdings if all the proceeds were used to repurchase the company’s shares, noting the significant loss of dividend income and capital gain taxes from any such sale. Both were voted down.

US proxy advisory firm Institutional Shareholder Services recommended voting against Doi at this year’s AGM in late June because of the bank’s hefty holdings in client shares. He got re-elected to the board by getting 75% of the votes cast. 

Doi said the percentage of votes for him increased as a result of the bank’s efforts to engage with overseas investors, with some of them changing their stance after hearing its rationale for holding such shares. The bank has been stepping up efforts to reach out to holders, visiting them in the US, the UK and Singapore in recent years.

“We are thinking about looking for investors who agree with our policies in regions like Asia and the Middle East,” he said.

The lender has said it plans to decrease its strategic holdings, though Doi said the bank has no plan to sell the bulk of those stakes and he wants to disclose the updated reduction plan around the time of its half-year earnings in November.

Uploaded by Liza Shireen Koshy