Japan Stewardship Forum PWG[i]
Group for Expressing Opinions on Cross-shareholding

We have been discussing Cross-shareholdings as governance and the efficiency of balance sheets for decades since Japan FSA introduced the Corporate Governance Code. However, we still can’t solve this issue. Some Volunteers from the Japan Stewardship forum have discussed this topic over the past six months and published our opinions in this paper. We would like to share this with all concerned parties.


1. The negative impact of the Cross-shareholdings

In our discussions, we set the following premises:

  • Cross-shareholdings refer to shares classified not for pure investment purposes but to strengthen trade relationships with the held companies.
  • Cross-shareholdings are motivated by mutually holding voting rights, which were historically developed to weaken the influence of institutional investors’ voting exercise.
  • However, a more critical point is that companies listed on the stock market are expected to raise funds from shareholders and allocate capital optimally. Then, they are expected to manage with an awareness of capital costs and strive to maximize corporate value. The existence of cross-shareholdings in listed companies is a problem that cannot be reasonably explained to shareholders.

In 2023, an incident occurred in the non-life insurance industry where competitors adjusted insurance premiums. One cause was said to be the influence of cross-shareholdings. Minister of Finance Suzuki commented that it is important to accelerate the sale of cross-shareholdings. Cross-shareholdings can reinforce irrational practices that have long been prevalent in the industry, and regulators have clarified that they must be eliminated.

As a result of this incident, we believe that the issue of cross-shareholdings impacts not only voting rights and capital efficiency but also fundamentally influences corporate behaviour and thinking. This, in turn, could significantly affect the stock market. This paper states our opinion that cross-shareholdings pose numerous issues to the companies themselves, ultimately resulting in a loss of corporate value.


2.  Issues of Cross-Shareholding: Points of Discussion, Awareness Arising from Holdings, and Market Impact

I. Issues in Companies that Force Cross-shareholders to keep their stakes

  • Obstruction of Reflecting Shareholder Intent:
    • Distortion of Proxy Voting: It is still fresh in our memory that Chairman Mitarai of Canon narrowly secured 50.6% approval (mainly due to the absence of female directors) at last year’s shareholders’ meeting. Similarly, other top executives received low approval ratings: 56.6% for Fuji Media Holdings (due to involvement in Olympic corruption) and 58.8% for Suzuken (due to antitrust law violations). Without the existence of cross-shareholdings, these approvals might have been denied. Cross-shareholders tend to support the management regardless of scandals or governance failures, thus effectively obstructing the reflection of minority shareholders’ intentions in management.
    • Obstruction of Control Changes: Another arena where shareholders can directly express their intentions is during a tender offer. A notable recent example is the MBO of S-Line Group, a logistics company listed on the TSE Standard, where the buyer publicly disclosed having secured 75% pre-agreement with cross-shareholders. While cross-shareholdings in Japan have decreased in monetary terms due to the dissolution of cross-holdings by large companies, the influence of cross-shareholders remains significant in small and medium-sized enterprises. In industries requiring restructuring, such as logistics, cross-shareholders accepting low-priced MBOs (with a PBR of 0.6 times) obstruct restructuring efforts, contributing to low profitability across the industry. This pattern is seen in many other industries, where cross-shareholding structures in small and medium-sized enterprises hinder industry-wide restructuring and impede Japan’s competitiveness. (See attached document)
  • Lack of Management Discipline:
    • In such situations, conflicts of interest with other shareholders in the holding companies should be pointed out. Additionally, if cross-shareholders are able to show their power to business contracts, , personnel matters, or any strategic business relationship, the management discipline should be affected a lot. The proxy voting decision-making process should become more transparent, especially in case of shareholders resolution, which require enhancing corporate value and the independence of the board. Even when the voting guidelines of cross-shareholders are disclosed, actual decision making process is untransparent.

II. Capital Efficiency Issue in Companies that are forced to Cross-Shareholdings by their stakes

  • Obstruction of Optimal Capital Allocation:
    • Several numerical analyses on cross-shareholdings have been done at several companies, which shows that the cross-share has achieved a sufficient return on assets. However, the primary purpose of “cross-shareholding” is not available for sale. Holding companies cannot freely sell these securities at its own discretion. Pursuing profitability for such non-sellable securities leads to unintended excessive risk-taking and likely hinders optimal capital allocation.
  • Distortion of Management Discipline:
    • An analysis was conducted on companies with cross-shareholdings from the perspectives of board structure, the number of directors, and the ratio of independent non-executive directors, resulting in the findings shown in the attached document. It was indicated that companies with a high ratio of investment securities tend to have governance structures with less effective management discipline and lower support from institutional investors in proxy voting. (See attached document 2)

III. Issue of unreasonable and untransparent Business Practices

  • Inhibition of Optimal Business Relationship:
    In case cross-shareholding relationship is prioritized in in business transactions, it is concerned that the most qualified and best products/services could not be available, which could potentially bring negative impact on the value of cross-shareholders. Furthermore, if the cross-shareholdings influences the business judgement, it could weaken the incentive for business partners to enhance the quality of their products and services. In industries with a large volume of cross-shareholdings, new entrants with innovative products and services, are less likely to be adopted. Such industries lack healthy competition, making it difficult to foster innovation, which not only stagnates domestically but could also undermine international competitiveness.
        Typical Case Study 1 – Regarding Supplier Shareholding Associations:

        • The Japan Securities Dealers Association established guidelines on the “Shareholding System” in 1993, which included guidelines for “Employee Shareholding Associations.” A chapter on “Supplier Shareholding Associations” was added in the 2008 amendment. The guidelines for “Supplier Shareholding Associations”[1] include a section on “Prevention of Abuse of Dominant Positions,” stating that there should be no discriminatory treatment in business relations based on membership in such associations.
        • In discussions with companies (through individual interviews, surveys, etc.), questions about “Supplier Shareholding Associations” revealed that only a few had withdrawn or dissolved their associations. On the other hand, some companies, despite consultations on withdrawal, are forced to continue membership or find it difficult to easily resign considering their relationship with suppliers. This indicates that the principle of “Prevention of Abuse of Dominant Positions” is not always adhered to.
        • Additionally, the previous section pointed out “Capital Efficiency Issues” in companies with holdings. In the case of supplier shareholding associations, continuing to increase stock purchases can impact the cash flow of member companies, even if only marginally. (See attached document)
        Typical Case Study 2 – Non-Life Insurance Industry:

        • As previously mentioned, the issue of alleged cartels of corporate insurance premium in the non-life insurance industry was influenced by cross-shareholding relationships. In this case, four non-life insurance companies, based on cross-shareholding relationships, had been doing pre-negotiations to adjust insurance premiums to cover risks that were difficult to underwrite independently in the corporate insurance sector. Even after such adjustments, it was recognized that corporate insurance had been loss making business for all four insurers. The background enforcing these irrational business practices was the long-standing cross-shareholding relationships.
        • Furthermore, there are concerns about the role of cross-shareholding relationships in the appointment of independent non-executive directors from related companies, contributing to the entrenchment of unreasonable business practices. Relationships involving cross-shareholdings and the dispatch of external directors are believed to have influenced the continuation of unreasonable business customs.

IV. Issues Posing Risks to the Stock Market

  • Destabilization of Shareholders’ Equity of Cross-shareholders
    • The risk of holding Cross-share is not controllable by the company itself, even though such risk is incorporated into the balance sheet. Such risk should be evaluated with market price and exposed to daily stock price fluctuations. The problem of procyclicality should also be pointed out, which can amplify economic fluctuations. The risks associated with cross-shareholdings often become apparent during economic downturns, potentially damaging the stability of financial and management strategies. While Japanese companies meticulously manage their PL, the sales and the expenses of their daily businesses, it is difficult to manage the balance sheet risk associated with cross-shareholdings to the same extent. Therefore, from a management perspective, cross-shareholding lacks consistency and rationality.
  • Obstacles to Market Segmentation Reform[5] :
    • the Tokyo Stock Exchange’s market segmentation reform require the Prime market companies whose tradable share market capitalisation did not reach 10 billion yen were subject to transitional measures. These companies needed to either increase their stock prices or the ratio of tradable shares. To increase the tradable share ratio, it was necessary to release the stocks held as cross-shareholdings. However, many Prime market companies under transitional measures chose to accept demotion to the Standard market without improving their taradable share ratios. Most of them did not explain the reason for change their segmentation to the Standard market. In rare cases where explanations were given, some pointed out the uncooperative attitude of corporate shareholders, which declined to reduce the stakes [2].

V. Insufficient Public Disclosure structure

  • Distortion in Disclosure of Cross-Shareholdings:
    • Institutional investors utilise the section of specific investment shares in the annual securities reports  for engagements with investee companies and decision-making for proxy voting. There are several cases where stocks are reclassified to “pure investments”, which are used to be stated as specific purpose investments [3]. The reason given for the reclassification is that consent for sale was obtained from the companies, which forced the cross-shareholders to keep their stake. Still, it is difficult to monitor the reduction record post-reclassification. Moreover, it is unclear how the auditors reviewed the rationale for reclassification; how did the auditors check the rationale to reasonably assume that the companies that force the cross-shareholders to keep their stakes allow the cross-shareholders to reduce their stakes.
    • Looking at the results for the fiscal year ending March 2023, reclassification has been done in over 80 companies, including regional banks and insurance companies [4]. However, in contrast, for example, the three largest megabanks have not done such reclassification in their annual securities reports, even though they have indicated the amount of sale consent in their IR presentation materials. It is undesirable for there to be discrepancies in the strictness required for disclosures of cross-shareholdings depending on the size of the company or the industry.


3.  Proposed Solutions

I. Proposals to Companies that Force Cross-shareholders to keep their stakes

  • Redefinition of Necessary Equity amounts from the Perspective of cost of equity
    • While information is disclosed in response to the Tokyo Stock Exchange’s request that management be conscious of capital costs, many cases remain insufficient. Companies that force other companies to keep their stocks should calculate and disclose the truly necessary amount of capital for business operations.
  • Disclosure of Board of Directors Awareness in Companies which forces cross-shareholders to keep their stake
    • Directors of companies, especially outside directors, are expected to discuss issues related to cross-shareholdings in the boardroom as representatives of the capital market. They must confirm whether the company they serve as directors prohibit other companies from selling their stake by threatening them to indicate a negative effect on business relationships. Such an irrational attitude, which should reduce the asset efficiency of other companies by threats, should not be acceptable. If such activity is identified, the board directors must take decisive actions. It is essential to disclose the board of directors and outside directors’ recognition of these issues in securities reports, corporate governance reports, and notices of the annual general meetings.

II. Proposals Companies that are forced to Cross-Shareholdings by their stakes.

  • Setting KPIs based on the point of view of cost of equity
    • Companies with cross-shareholdings should disclose the return on their holding stocks compared to their cost of equity. Return on Risk-Weighted Assets, RORA, is not applicable from investors’ viewpoint. Market value is recommended for these calculations.
    • Cross-shareholders should have liabilities to enhance the corporate values of holding companies. If so, they should exercise voting rights based on the value perspective, which should be the most important criterion. To do so, cross-shareholders should actively engage with holding companies to enhance their corporate value and disclose the contents of engagements.
  • Disclosure of Proxy Voting Results
    • Recently, there has been an increase in activities such as TOBs, MBOs, and shareholder proposals from the perspective of cost of equity. It is necessary to enhance transparency for cross-shareholders by disclosing whether the proxy voting decisions were made to maximize corporate value in response to various corporate actions.
    • As noted on page 5 of the “Action Program for Substantiating Corporate Governance Reform (Draft)” from the Financial Services Agency’s “The Council of Experts Concerning the Follow-up of Japan’s Stewardship Code and Japan’s Corporate Governance Code (29th Meeting)” held on April 18, 2024, it is generally recognised that while companies are making efforts to reduce cross-shareholdings, appropriate actions such as disclosure reflecting the actual situation, including the statement of proxy voting records, have not been enough.
    • Investors strongly desire improved information disclosure to understand whether cross-shareholdings genuinely contribute to the governance and value enhancement of both sides of the cross-share relationship. It is strongly recommended that the proxy voting results of cross-shareholdings be disclosed.
    • There is a category described as stocks for investment held for pure investment purposes in the section of cross-share or Specified Investment Shares in the Annual Securities Report. In the case of pure investment, treatment and principles similar to those of the asset management industry should be applied. The appropriate organisational structure of such an investment-related division should be disclosed. Also, the company should declare the acceptance of Japan’s Stewardship Code. Cross-shareholders should make voting decisions based on Principle 5-1 of Japan’s Stewardship Code, establish the proxy voting guidelines, and disclose the voting results based on 5-3.  Disclosure of each individual agenda is recommended; however, the aggregate of major category of agendas should be the minimum requirement.
  • Disclosure of the Board of Directors’ Recognition about Cross-Shareholdings
    • It is a critical responsibility of the board of directors to monitor the reduction of cross-shareholdings to encourage the companies to implement the management which is conscious of capital cost. Additionally, it is essential for the board to ensure that voting rights exercised for cross-shareholdings and the voting decisions should be aligned with consideration for the interests of minority shareholders and do not support anti-takeover measures. The board’s recognition of those responsibilities should be disclosed in annual securities reports, corporate governance reports, and notices for annual general meeting
  • Declare the necessity to deal with Pro-cyclicality
    • The best strategy to avoid the negative impact of cross-shareholdings is to reduce them. However, at the very least, the board of directors should have a quantitative measurement of the risks associated with cross-shareholdings. The board should discuss the risks and impacts of cross-shareholdings, estimate such risks based on the scenario analysis of each stock. Based on such quantitative analysis, the board of directors should discuss about the rationale for cross-share relationship the estimated acceptable risk amount, and all the backgrounds for the conclusions. When the company calculate the risk amount, it is recommended to compare the profit from business relationship from specific stock with the market value volatility of the stock.

III. Issues Causing Untransparent Business Practices

  • Prohibit Untransparent Business Practices
    • In case the counterparts have stakes, the board of directors should confirm and publicly disclose that the business counterparts are not being treated discriminately based on whether or not they hold the company’s shares, the amount of stakes, or any other similar criteria. Additionally, it should be confirmed and disclosed that no unfair treatments, are being applied in those transactions. This treatment aligns with the Japan Securities Dealers Association’s guidelines on preventing the abuse of dominant positions regarding supplier shareholding associations.


[1] Japan Securities Dealers Association, “Guidelines on Shareholding Systems” (Revised June 15, 2022) Link

[2] Yoshiaki Akeda, “Study on Companies Applying for the Standard Market Selection under the TSE Reorganization” (Japan Securities Research Institute, October 26, 2023)

[3] Financial Services Agency, “Follow-up Meeting on the Stewardship Code and Corporate Governance Code” (April 18, 2024), Secretariat Explanation Materials, page 10

[4] Financial Services Agency, “Follow-up Meeting on the Stewardship Code and Corporate Governance Code” (April 18, 2024), Secretariat Reference Materials ①, page 23

[5] The Tokyo Stock Exchange reformed the market segmentation from 1st,2nd,
Mothers and JASDAQ to Prime,Standard and Growth on April 4th,2022.

We would greatly appreciate your opinions or comments on this opinion statement or our initiatives. Please send them to Cross-shareholdings (at) gmail.com (replace “at” with @).