For Japan Inc, discretion is the better part of activist valor

By Tomo Uetake

As Japan enters the busiest period of its annual general meeting season, shareholders will submit a record number of proposals to companies amid signs activist efforts to instigate change among conservative corporates are bearing fruit.

But while overt and direct activism has stepped up, it's the less combative behind-the-scenes lobbying, much of which takes place before the public meetings are held, that is having some of the greatest impact on governance changes.

The most visible example of that change is scandal-hit medical equipment maker Olympus Corp, which will become Japan's first major firm to give a U.S. activist fund a seat on its board this month.

"Companies are much more willing to listen to shareholders and take action in response to shareholder engagements," said Seth Fischer, founder and chief investment officer of Hong Kong-based hedge fund Oasis Management. "You're seeing more independent directors on board, more companies getting rid of their poison pills, more buybacks and increased dividends. It's all happening."

About two-thirds of firms listed on the Tokyo Stock Exchange hold their AGMs this week.

Mitsubishi UFJ Trust & Banking says the number of companies that have received shareholder proposals during this year's peak AGM season is a record 54. That's more than last year's 42, which was also a record, although all of those submissions were ultimately rejected.

Of note this year is the gradual withdrawal of some proposals as activists confer privately with companies to quietly get their demands met.

Toshiba Corp is a case in point. In March, New York-based King Street Capital Management sent a letter to the CEO to propose a slate of directors to replace the Toshiba board. It had previously intended to submit a shareholder proposal for its AGM, scheduled for Wednesday.

But behind-the-scenes discussions with King Street and other funds resulted in Toshiba announcing last month an overhaul of its own proposal of board members to include more external and even non-Japanese directors for the first time in 80 years.

"There is a lot more going on than the number of shareholder proposals implies," said Kengo Nishiyama, a senior analyst at Nomura Institute of Capital Markets Research. "I think behind-the-scenes engagement will become the mainstream of Japan's activism."


Analysts say softer activism is one factor driving the shift in companies' attitudes. Also helping are Prime Minister Shinzo Abe's efforts to improve governance and a corporate recognition that investors reward companies that shake up their management.

Olympus' share price has climbed more than 40% year-to-date, making it one of the top three performers in the benchmark Nikkei average. That in part follows its decision in early January to grant San Francisco-based investment fund ValueAct Capital a seat on its board.

In contrast, firms that outright knock back shareholder demands are punished. Last week, Kyushu Railway Co's shares slumped 4.5% after shareholder proposals made by New York-based Fir Tree Partners and supported by other firms were rejected.

That reality has prompted change.

Sojitz Corp's CEO, Masayoshi Fujimoto, took part in another first-of-its-kind shareholder forum, alongside activist investors and a government representative, that the American Chamber of Commerce in Japan held earlier this month.

"We hope to attract more long-term shareholders," the trading firm said. "For that, we think it's important to reach out to foreign institutional investors."

The shift away from a zero-sum game approach to activism comes as funds see some change as better for shareholders than no change.

"Our aim is not to win the vote at AGMs. We are happy as long as our portfolio company's value gets a boost in any way," said Tsuyoshi Maruki, founder and chief executive of Tokyo-based activist fund Strategic Capital.

Oasis's Fischer said his fund withdrew most of its planned proposals before the AGMs after meaningful behind-the-scenes engagement with companies.

Some long-only investors also say they feel the activist approach is now more in line with their thinking.

"I noticed several cases where activist funds have made the same demands as us. This is something new, something that hasn't happened a year ago," said Archibald Ciganer, co-head of Japanese equities at U.S. asset manager T.Rowe Price.

Another sign of corporate change is an increase in firms' share buybacks, which are expected to hit a record this year. Share buybacks worth 5.57 trillion yen ($52 billion) have been announced by 519 companies so far, much higher than the 2.84 trillion yen by 365 in the same period last year, according to the data compiled by Citigroup.

CLSA's Japan strategist Nicholas Smith says while public rows at AGMs benefit few investors, confrontational engagement still plays a role in driving change.

"When having discussions, it's important to remind companies that if they fail to be reasonable, activists do have other measures they could employ," Smith said. "It is crucial that AGM proposals do not become paper tigers."

© (c) Copyright Thomson Reuters 2019.

©2019 GPlusMedia Inc.

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Change will come, in about 2 or 3 generations!

6 ( +6 / -0 )

I think that should be, “Discretion is better than being caught.”

3 ( +3 / -0 )

Activists' purpose is profitting themselves by intimidating corporations. They invest and after making money they go. Having said that, it has a good aspect too. Japanese corporations have long ignored shareholders but in recent time they are rewarding more to them.

1 ( +1 / -0 )

There are pluses & minuses...…….sounds like modern nemawashi to me!

1 ( +1 / -0 )

Most of the time an activist is a representative of a group of slobbering ghouls gnashing their teeth at the chance to "make a difference".

Word Count -- Activist: 14 Appearances / Activism: 4

Definitions of "Activist": 0

Only an activist editor would let that one slide.

2 ( +2 / -0 )

NOTHING changes in Japan. It's smoke and mirrors.

1 ( +2 / -1 )

Interesting read. I kind of witnessed this when translating a company's AGM documents. The original draft included a shareholder proposal for replacing the leadership (the stated rationale for the proposal included a slamming indictment of the management's incompetence).

While I was midway through translating it, the client suddenly sent a new version of the draft with the shareholder proposal removed. The contents of the shareholder proposal had been integrated into the company's own proposal for director appointments, and the rationale became something generic like "to ensure effective oversight and execution of duties, blah blah blah".

2 ( +2 / -0 )

Talk but are things really happening ???.Pls look at the Nissan case, nothing is happening. Surely, no foreign investors will invest in Japan any more. Nissan example of how Japanese firms treat foreigners operators & share holders is really a shame. All countries have their important documents bilingual, only japan have all their important documents & laws in Japanese. Even operations systems are in Japanese. Going international ???.only in their talks & their minds. Not real at all. Japanese firms will do anything or say anything to get profits. Not buying here. Better invest in 3rd world countries. At least , these countries have everything written in English 6 in their hearts and mind going international.

2 ( +3 / -1 )

In all countries, but most obvious in Japan, much of the corporate decisions are discussed and prepared even before the stockholders' general meeting and only those already "approved" actually gets on the agenda. Even if activists do create a scene and event, they usually have that covered in advance with people "planted" among them to push through their already planned agendas. That is what they cal l"uchiawase 打合せ” or simply something already internally agreed upon. And they always have such meeting "before" any meeting.

I have attended many such meeting in schools, companies and even non-profit organizations. There is very little opportunity to change the topics in the agenda. Probably the only thing one could change is trying to remove or add a name in a list of already selected and suggested board members and officers.

It is at those "uchiawase" meetings held by various factions before the company level "uchiawase" that the lobbyists contact and try to influence the company. It can be subtle and yet extremely effective pressure upon those that do prepare the final agenda.

0 ( +0 / -0 )

Interesting that they’d have this just as the G20 are meeting. Hide anything embarrassing behind the big news. The timing can’t be a coincidence. The G20 will grab all the headlines while Ghosn, Saikawa and less than perfect corporate Japan are lost in the back pages. The unbecoming face of activism will be hidden.

1 ( +1 / -0 )

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