Japan Suspects Companies Are Evading Disclosure of Cross-Shareholdings

(Bloomberg) — Japan is increasing pressure on companies with extensive cross-shareholdings.

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The government wants companies to be more transparent about why they hold stakes in other firms. The practice has long been criticized as contributing to poor corporate governance by protecting management.

The country’s Financial Services Agency requires companies to list their top 60 shareholdings considered strategic and to provide reasons for owning each stock. It suspects some companies of evading disclosure by masking cross-shareholdings as being owned for purely trading purposes.

“There are alleged cases of shareholding washing,” said Tatsufumi Shibata, deputy director-general at the FSA. “It’s unclear how much companies are actually reducing their strategic shareholdings.”

Shibata, who is in charge of corporate governance and disclosure, is not calling for an outright elimination of all cross-shareholdings. Instead, he is pushing for greater disclosure to help investors understand and analyze such holdings.

“We will examine companies’ annual filings for the year ended in March,” said Shibata. “We may need to consider measures depending on what we find.”

A review of the previous year’s regulatory filings found companies often employ boilerplate explanations, lacking specificity for why they own particular stocks, he said.

Such perfunctory disclosures also bury potentially meaningful investment, such as those in startups whose technology and business ideas could help companies build new growth drivers, he added.

“There are good strategic holdings. But sufficient explanation is not given for such investment, either,” he said.

His concerns highlight regulators’ renewed focus on cross-shareholdings at a time when their unwinding is drawing investor interest as a catalyst to boost the country’s stock market.

The practice has come under fire for shielding management by providing large blocks of friendly shareholders. This has led to banks and other firms selling off billions of dollars worth of shares in the past decade.

The FSA pushed the country’s property-and-casualty insurers to reduce cross-shareholdings in the wake of a price-fixing scandal last year. In response, the major insurers pledged to eliminate all holdings of their corporate clients’ shares worth more than 6 trillion yen ($38 billion).

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The agency plans to closely monitor the insurers’ efforts. Progress in reducing the holdings should be transparent even after the insurers move them to a portfolio classified as investment purpose, Shibata said.

“We are keenly interested in how the insurers will carry out the reduction plans and how they disclose them,” said Shibata. “They are trying to do a drastic thing. I hope they will aim high for disclosure and be seen positively by the market.”

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