Corporate Governance Reform in Japan Is Unlocking Value

In recent years, Japanese companies have begun to enhance their corporate governance in response to government policy, investor advocacy and internal pressures. Historically, Japanese firms have been known for their complex structures, such as parent-child listings, which can create conflicts of interest and result in discounted valuations. However, recent reforms are beginning to simplify these structures, unlocking previously trapped value. One clear example of this shift is the reduction in parent-child listings, where large conglomerates sell or buy back their listed subsidiaries to streamline corporate structures. These changes are not just theoretical; they have concrete effects for investors. Our investment in Mitsubishi Shokuhin, Japan’s largest food distributor, provides a timely example of how these reforms can unlock value.

Why corporate governance matters

Effective corporate governance ensures management acts in the best interest of all shareholders, not just controlling stakeholders. In Japan, large parent companies often keep public listings of their subsidiaries, creating potential conflicts of interest where the parent may prioritize its own interests over maximizing returns for minority shareholders of the subsidiary. This practice has historically led to suboptimal capital allocation decisions that do not benefit all shareholders equally.

Recognizing these challenges, Japanese corporate governance has undergone significant reforms since 2015, including the Corporate Governance Code adopted in June 2015, which has promoted greater subsidiary independence and enhanced protections for minority shareholders. The Tokyo Stock Exchange has increased pressure by requiring companies trading below book value to develop capital improvement plans. Starting in 2024, it began publicly naming companies that fail to comply with these requests, using a "name and shame" strategy to boost corporate governance and valuations. These reforms have led to structural simplification, resulting in better management accountability and more shareholder-friendly capital allocation.

Introducing Mitsubishi Shokuhin

We initiated our position in Mitsubishi Shokuhin in early 2024, recognizing a rare mix of stability, valuation appeal and underappreciated upside. The company, a domestic-focused food distributor, operates with thin margins but maintains robust financial health. In fact, over 60% of its market cap was in cash and investments at the time of our purchase.

We liked the business because it was boring in the best possible way: market leadership, strong relationships (notably with Lawson, a major customer), improving capital allocation and limited downside risk. Historically, Shokuhin had been managed conservatively to a fault, with flat dividends, little investment in efficiency and tolerance for unprofitable business lines. But since 2021, under the direction of a new CEO appointed by majority owner Mitsubishi Corp, the company began eliminating money-losing contracts, increasing dividend payouts, tying executive compensation to returns on equity and investing in modernizing its operations.

We believed this transformation wasn’t yet fully appreciated by the market. The low valuation reflected skepticism rooted in Shokuhin’s past rather than its future. That disconnect between current price and intrinsic value gave us confidence in the margin of safety. Combined with its market leadership and operational stability, it also matched our preference for owning businesses we thoroughly understand, with low financial leverage, stable end markets and governance we can trust. In short, it exemplified traits of a stock with a low accident rate and upside potential.

The power of embedded optionality

From the outset, we recognized a powerful, underappreciated feature in Mitsubishi Shokuhin: embedded optionality. While we were comfortable owning the stock for its own merits, we believed there was a chance that its majority owner, Mitsubishi Corp, might seek full ownership as part of broader governance reform. That outcome, while not necessary to our thesis, offered significant upside if it materialized.

In May 2025, that optionality paid off. Mitsubishi Corp. announced its intention to buy out the remaining shares at a 26-27% premium above the average price of recent months.

Reflections and takeaways

While we would have liked a higher takeout price (our estimate of intrinsic value was actually 25% higher than the takeout offer), this outcome affirms our belief that investing in stable businesses with prudent management at an attractive valuation can yield a positive outcome for our clients.

Mitsubishi Shokuhin also highlights the value of being nimble and willing to do the work in underfollowed corners of the market. This was a stock with almost no sell-side coverage and little visibility in Western investment circles. But that obscurity is precisely what allowed the dislocation to exist. Our flexible approach enables us to go where others are not looking and identify compelling opportunities to generate alpha.

It is a reminder that valuation discipline and fundamental analysis can uncover meaningful upside. And when embedded optionality becomes realized value, it can add a powerful layer of return to an otherwise conservative investment thesis.