In Japan Inc, activist investors come in from the cold

By Makiko Yamazaki and Noriyuki Hirata

Yasuo Takeuchi remembers the horror he felt in 2017 when, as chief financial officer of Japan's Olympus Corp, he was told an activist investor had taken a stake in the company: the barbarians were at the gate.

But as he listened to proposals from ValueAct Capital, Takeuchi began to see the San Francisco-based fund as a potential catalyst for change at Olympus, which was still reeling from an accounting scandal and, he believed, remained too domestic in its outlook.

Fast forward to 2021, a leaner Olympus is on track to double its operating profit margin to 20% by the next financial year.

Olympus is a notable example of how attitudes at some Japanese companies have quietly changed in recent years. The government's recent push for better governance has brought in a wave of seasoned global activists, such as Elliott Management and Third Point, to Japan; the number of activist funds operating in the country has also more than doubled in three years.

In 2019, Olympus brought a ValueAct partner, Robert Hale, onto its board. ValueAct owned more than 5% of Olympus, the fund's first investment in Japan, before selling some of that late last year.

"I was ready to turn all of our business as usual upside down," Takeuchi, now CEO, said of the time he brought Hale on board.

"Rob really watches the company closely and analyses it. He has often given us some great insight in how to execute," he told Reuters in an interview.

Olympus has since overhauled the traditional seniority-based pay and brought in more overseas executives to make management more global. Takeuchi credits ValueAct with helping him "think deeper" about governance, leading to the creation of nominating, audit and compensation committees.

Efforts to become a global medical-technology firm have accelerated. Olympus has bought several overseas medical-equipment firms and sold its digital camera business that had been a long-time money-loser.

Takeuchi said Hale never told Olympus to sell the camera business, only that he "pointed out issues, like other external directors".

Hale has also helped Olympus communicate its changes to the market, so as to have a greater impact, Takeuchi said.

Investors appear to be taking note. The company's shares have nearly trebled since early 2019, versus about a 30% gain in the TOPIX index.

ValueAct declined to comment on the story.

Investors, particularly foreign ones, have long argued that many Japanese companies are unresponsive to shareholders and need to improve governance. Issues around governance and management have come under the spotlight in accounting and other scandals at Toshiba Corp, Olympus and elsewhere.

Olympus' plan to boost efficiency "became more convincing around the time it decided to invite ValueAct to its board," said Takashi Akahane, senior analyst at Tokai Tokyo Research Center.

Japanese chip and display materials maker JSR Corp, which is more than 7% owned by ValueAct, is also inviting Hale onto its board.

The company hopes the American's knowledge and expertise will boost its corporate value, said Director Hideki Miyazaki. It wants to speed up decision making and become more global, Miyazaki said.

Joe Bauernfreund, chief executive of London-based Asset Value Investors (AVI), says he sees clear changes at Japanese companies.

As a foreign investor focusing largely on smaller companies, his fund rarely got to meet directors of companies a few years ago, he said. "I think there definitely is a willingness on the part of companies now to work in a more constructive manner with so-called activists."

Activists themselves are also taking a different tack, moving away from hostile takeover threats seen decades ago to a focus on governance and long-term corporate value. That approach, experts say, is likely to have more success - and gain more support from conventional institutional investors.

Last month, a motion by Singapore-based activist investor Effissimo Capital Management in Toshiba Corp won approval at a shareholder vote, the first time at such a high profile company in Japan.

Still, experts note it is too early to say shareholder activism has taken full root in Japan.

Sony Group's rejection of Third Point's proposal to spin off its chip unit is a prominent recent example, and despite Effissimo's success at Toshiba's vote the firm's management is yet to fully embrace the activist investor.

"Companies like Olympus are a few exceptions, with most firms hoping to stay away from activists," Kazunori Suzuki, professor at Waseda Business School, said. "But if those early examples prove successful and receive public acclaim, others may follow suit."

© Thomson Reuters 2021.

©2021 GPlusMedia Inc.

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I've seen these group dynamics play out in institution after institution ... educational, journalistic, governance, religious, scientific, and even NPO's.

— Communities become institutionalized for commodification.

— This trend is led by those high in 'dark-triad' personality traits ... narcissists, opportunists, and psychopaths.

— Traditions, rules, and algorithms displace empathetic paths of communication.

— Credentialism displaces meritocracy

— Social status in the hierarchy tends to become more highly correlated with extraction of resources from those of of lower status, rather than creativity or production of wealth.

— Given enough time, mission drift, corruption, and eventual collapse are inevitable, wise management can only postpone the inevitable, relatively fair and egalitarian communities are as ephemeral as Mayflies.

0 ( +2 / -2 )

Japan's change is being forced by external governance. Low performance and low productivity puts downward

pressure on share price that has led to foreign owners coming in to takeover weak Japanese companies. Japanese companies are realizing what majority rule really means with shareholder ownership. The new foreign owners are Kicking out bad management and founding families from their thrones. Kingdoms will fall in Japan and we will finally see the needed change in Japan Inc. "All hail foreign ownership!"

0 ( +1 / -1 )

Takeuchi said Hale never told Olympus to sell the camera business, only that he "pointed out issues, like other external directors".

The other external directors were a problem?

2 ( +2 / -0 )

"All hail foreign ownership!"

Japan pretty much created its own downfall anyway. Foreign owners will finally start moving things around for the better. Look at Sony, foreign owners forced positive changes where Sony focuses on creating good gaming devices instead of Sony rice cookers!!

Don't get drunk on an economic bubble! That's the lesson that all nations can learn from Japan.

-1 ( +0 / -1 )

Well, good to see there is some kind of positive change happening in corporate Japan. That being said, the Ghosn case is still very fresh in my mind, so to be perfectly honest, I don't trust the Japanese. They are praising foreign investors now because they are bringing about growth, but I bet that as soon as they get a chance to, they will want to take back power and exclude foreign management, or even worse, repeat the whole nissan debacle again.

0 ( +0 / -0 )

"Activist Investor" is generally just a self styled name adopted by a "Corporate Raider" and designed to feel more PC to the business and media world . Still early doors at Olympus and we will see, but nobody should be fooled by (and everyone wary of) the AI moniker.

0 ( +1 / -1 )

Simply because a business model has myriad flaws and is resistant to reform, don't assume that activist investors are an inherently good thing.

Most are simply looking to make a quick buck by asset stripping a company to the bone, even if they cover this in trendy euphemisms.

1 ( +2 / -1 )

There goes Robert Hale; I must remember to thank him.

-1 ( +0 / -1 )

More Asian people are needed for such roles.

-1 ( +0 / -1 )

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