Shareholder activism catches fire in Japan

June 22, 2014 4:28 am

Shareholder activism catches fire in Japan

By Ben McLannahan in TokyoAuthor alerts

Shareholder activism is catching on in Japan.

A record 14 shareholder proposals for higher returns will be made at annual general meetings this month, according to IR Japan, a research firm.

Five are from a single investor – The Children’s Investment Fund of London – which will be coming back at Japan Tobacco on Tuesday with a similar set of resolutions to the ones rejected for the past two years. (Since then, though it denies any causation, JT has raised payouts.) The rest are from individuals and domestic institutions.

As in Europe and the US, many of these will probably fail to win majority support, say analysts. But the fact they are being made at all is noteworthy. While investors in other developed markets routinely tangle with management teams over matters such as remuneration or succession, Japan’s institutions tend to be a docile bunch. They rarely vote against company resolutions, let alone come up with their own.

However, under Prime Minister Shinzo Abe’s plan to breathe new life into the world’s second-biggest equity market, investors are expected to speak out, and often. A new seven-point Stewardship Code for institutions, modelled on the UK’s, obliges asset managers to engage with management teams on matters of strategy and governance and to avoid casting votes like a “mechanical checklist”.

More than 120 institutions have already signed up – many taking their cue from the Y129tn-in-assets Government Pension Investment Fund, which sees stewardship responsibilities as “important to improve the long-term risk-return profile” of stocks, according to Sadayuki Horie, deputy chairman of the GPIF’s investment committee.

In a further sign of a warmer climate for activism, the GPIF in April added Taiyo Pacific, a Seattle-based “friendly activist,” to its line-up of external managers.

The landscape is “dramatically changing,” says Shiro Terashita, chief executive of IR Japan. “Managers will have to think more carefully about dividends or share buybacks.”

According to Tomoyuki Furusawa, director of the policy and legal division at Japan’s Financial Services Agency, the government’s aim is to banish the deflationary mindset of the past 15 years, where it was “rational” for companies to hold cash and bonds and for investors to accept feeble returns from equities.

The five-year average return on equity among companies on the Topix 500, for example, is less than 8 per cent, compared with more than 18 per cent on the S&P 500.

Even as rising inflation erodes returns on deposits, corporate cash-hoarding persists. Data last week showed that Japanese companies held a record Y232tn ($2.3tn) in cash at the end of March, up more than 4 per cent from a year earlier.

“Too many investors are sleeping on their rights,” says Tsuyoshi Maruki, chief executive of Tokyo-based Strategic Capital.

In March Mr Maruki made a splash at the AGM of Daiwa Industries by challenging president Atsushi Ozaki to boost the dividend from a fixed Y10 per share to Y75 per share – equivalent to 100 per cent of net profits – or explain why he could not.

Daiwa, a debt-free manufacturer of fridges, freezers and ice-making machines, has over the past 20 years built up a cash pile roughly the same size as its Y36bn market capitalisation. Only once, in 1997, did it dip into reserves, paying an extra Y1 per share in dividends to celebrate 40 years in business.

“If he has no plan to give [the cash] to us, he should increase capital spending or do some M&A to increase shareholder value,” says Mr Maruki, whose 4.7 per cent stake makes him Daiwa’s biggest shareholder not linked to the founding family.

This level of feistiness is still rare in Japan, says Masakazu Hosomizu, portfolio manager at Chicago-based RMB Capital. But similar challenges from investors holding as little as 1 per cent of shares for six months – the minimum qualification for making proposals – “could be a very scary scenario for management”, he says.

Towards the gentler end of the activist spectrum is Yasunori Nakagami, president of Misaki Capital. Rather than turning up unannounced on a shareholder register and demanding changes, he prefers to scope out potential targets beforehand to gauge their “hunger” and willingness to listen to new ideas.

“We believe that softer activism is a lot easier,” says one of his partners, Masaki Gotoh. “If you do have to take out your gun at some point, it is better to have had a good relationship before.”

As for Mr Maruki, his proposal to Daiwa was rejected. But he says he will persevere, while aiming to cause similar scenes at other AGMs this week.

“If I give up on [the Daiwa] case, then other companies will think I will give up if they resist,” he says. “But if we don’t get cash moving, Japan will never recover.”



About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (, a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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