The Little Post about Shareholder Activism in Japan - (Part 3)

"Elements of the traditional Japanese culture are apparent within its corporate environment. It has proven over time to be both beneficial and detriment to creating shareholder value. It remains to be seen what style Japan will adopt form more aggressive western capitalism within its financial market, and what will remain uniquely Japanese." (Brandes)

This is the last post on a series that tries to deal with the rather new phenomenon of shareholder activism in Japan. In the first part, which can be found here :The Little Post about Shareholder Activism in Japan  - (Part One) , I tried to outline the history of activist approaches in Japan and the main players involved.

In the second part, which is to be found here: The Little Post about Shareholder Activism in Japan - (Part two) , I intended to detail common characteristics of targeted companies and the strategy and philosophy of the most prominent foreign activist funds, i.e. Steel Partners. In addition, I expounded some strategic errors by the activist funds and scrutinized the action taken by the management of those targeted firms to activist approaches.

Introduction

In the first section of this final post on shareholder activism in Japan, I will concentrate on a common request of many activist funds and market participants, namely the bolstering of the corporate governance framework in Japan, which many Japan observers deem as too weak. Many regard the Anglo-Saxon corporate governance framework as superior to the Japanese system. But literature on that subject is very conflicting and corporate scandals did not happen only in Japan. They were numerous in the U.S. as well. How does that fit in the supposed superiority of the Anglo- Saxon model?

Following I will turn my attention on what I regard the most pressing issue in corporate Japan, i.e. an adequate pay-out policy to the shareholders by the management. A rather liberal pay-out policy, intelligently implemented, goes hand in hand with a good corporate governance framework. Dividends and share repurchases work as an automatic governance mechanism, as it takes a part of the funds from the management’ discretionary accounts. If accumulated profits in the treasury of a company are high, there is always the risk of being spent on value destructing projects by the management of such a company. A lot has changed in Japan regarding returning funds to the shareholders. In many instances companies increased its dividends and/or repurchased its shares, not seldom significantly. But still, given the "hidden" earning power at many Japanese companies, the overall payout ratio has to be regarded as too low in aggregate.

In the last section I will try to show the status-quo and what the future might hold concerning corporate governance, the return of funds to the shareholders and shareholder activism in Japan. A lot has happened the last 20 Years regarding the attitude of the management towards its shareholders in Japan. The Japanese stock market has become very fragmented when it comes to shareholder friendliness and/ or disrespect towards them by Japanese management. To lump together Japan as a stakeholder orientated economy, with concomitant disregard to the shareholders, is plain wrong and misjudges the facts.

Corporate Governance: The Two Ideologies

Corporate Governance (Jap.:kôporêto) is defined differently depending on the respective economic actors. Since the onset of publicly traded corporations, there have been two schools of thought about the way corporations should be managed.

The Shareholder Primacy Advocates

The first adheres to the “shareholder primacy” argument. It holds that publicly held corporations should serve only the interests of the shareholders. Directors and executives of companies should focus solely on maximizing shareholder wealth through the payment of dividends and through raising their stock prices. (IR Insight) Adam Smith's notion of the invisible hand of the market forms the basis of that view. He laid out in his seminal book The Wealth of Nations that if a company maximizes the wealth of their shareholders and individuals pursue their own interests then the allocation of resources is efficient in the sense that nobody can be made better off without making somebody else worse off, i.e. a pareto efficient outcome. From such a perspective the role of a corporation in society is precisely to create wealth for shareholders. This fundamental idea is embodied in the legal framework in the U.S. and U.K. In these countries managers have a strong fiduciary duty to act in the interests of shareholders. (Allen et al) Thus, from a shareholder point of view corporate governance is defined as a framework of rules, practices and processes that ensures capital providers to get an adequate return on their invested capital. (Moerke)

The Manageralist View Advocates

The second school of thought is the “managerialist” view. This view was predominant in the first half of the 20th century and in many instances still is so in Japan. (IR Insight) It argues that instead of companies focusing solely on creating wealth for their owners, corporations should have a broader view when it comes to corporate governance (Allen et al).

One way of articulating this view is that corporate governance is concerned with ensuring that firms are run in such a way that society’s resources are used efficiently by taking into account a range of stakeholders. Their definition of corporate governance is that it describes a system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company. These include its shareholders, management, customers, suppliers, financiers, government and the community.

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Corporate Governance And The Principle- Agent Problem

From the shareholder’s point of view the problem with the corporate governance system of a company arise through the separation of ownership and management. Separation leads to the so called principle- agent problem, i.e. the conflict of interest between the owners of a company (Shareholder) and its management. The shareholders of a company have an interest in maximizing the return on their invested capital. The management, on the other hand, seeks to maximize interests that often diverge significantly from those of the owners by, for example, maximizing their personal income and/ or their utility of other resources of the Company and/ or following a strategy of "empire building" in order to increase their prestige.

The principle-agent problem is further aggravated through information asymmetries between the owners and their management. Shareholder often lack essential information to evaluate the actions of its management. The management, on the other hand, has excess to a wealth of (inside) information, which can be used by the management for achieving their individual goals at the cost of the shareholders. A good corporate governance framework therefore intends to solve, or at least to minimize, the principle- agent problem and information asymmetries between the owners and its management. (Moerke)

Corporate Governance in Japan

Especially in Japan many market participants see an inadequate corporate governance framework, that does not tackle the principle- agent problem effectively, the single most important fundamental issue in its corporate structure. They argue that the most effective way to achieve the protection of shareholder interests is through an Anglo-Saxon corporate governance framework with outside director independence.(SPJ; September 2008)

Furthermore, they hold that in Japan managers do not have a fiduciary responsibility to shareholders. Although the legal obligation of directors in Japan is such that they may be liable for gross negligence in performance of their duties, including the duty to supervise. In practice it is widely accepted that they pursue the interests of a variety of stakeholders. (Allen et al).

The Japanese corporate governance system was last amended in 2002. Since then basically two frameworks for corporate governance exist in Japan: 1) The traditional Japanese system with statutory and independent auditors (the statutory auditor system/ Jap: Kansayaku) and 2) a committee-based system, modelled on the Anglo-Saxon approach, which involves separate audit, remuneration and nomination committees with a majority of outside directors on the boards. (Economist 2)

For many advocates of an overhaul of the corporate governance framework in Japan the current system is not going far enough. Corporations in Japan can choose between one of those aforementioned governance frameworks, but only a handful of companies, like Sony, Hitachi, Toshiba, etc., opted for the committee-based system. As the concept of independent outside directors is only required for companies with a committee structure, and in practice the majority of Japanese companies still retain the Kansayaku structure, the number of independent outside directors is extremely limited in Japan . (Economist 2)

Warren Lichtenstein was a vocal critique of the Japanese government framework and noted: "(...)While only companies with a committee structure are presently required to appoint external directors, all listed companies, even those with traditional board structures, should be required to appoint a minimum of three independent external directors as soon as practicable. In the medium term, such directors should comprise a third of the board and ultimately, external directors should comprise one half of the board of listed companies. This would then reflect international corporate governance standards (for example, in the U.K., the Combined Code on Corporate Governance requires U.K. listed companies to maintain at least one half of its board as independent non-executive directors). Both the Japan Pension Fund Association and leading proxy voting agencies, such as Glass Lewis & Co., support the recommendation that at least one-third of the board of directors of Japanese listed companies consist of genuinely independent directors. (...)" (SPJ; September 2008)

Definition of External Directors Very Broad in Japan

Moreover, the definition of external directors in Japan allows directors from parent companies or relatives of managers to be viewed as external. (SPJ; September 2008) Hence, the Japanese definition of outsider is not necessarily one that foreigners would recognize. One survey found that in 2007 30% of outside directors came from partner companies, 18% from other companies in the same keiretsu, 16% from a parent company and 5% from the company's main bank. True, some Japanese companies—Sony is a notable example—have installed genuinely independent outside directors on their boards. But others, like Toyota, still do not have any outside directors at all. (Economist 2)

"(...) while we have outside directors, the number of such directors is very small and the level of independence is still very low. As I have said, only 40% of listed companies have outside directors and, of those that do, 54% only have one. Often these outside directors come from the company’s business partners or financial institutions. Since there are no independent directors that can challenge top management, the board’s supervisory functions are not fully exercised, leading to low performance by the companies, as well as one misdeed after another by management. Therefore, I would like to assert the need for outside, independent directors. (...)" (Yano)
  

Independent Outside Directors: A Panacea?

Advocates of the Anglo-Saxon model of corporate governance bring forth several arguments. In their point of view outside directors would guarantee an appropriate external viewpoints, and thus help to improve the efficient use of capital and guide the companies to become more competitive and adept at risk management.
 
The idea is that independent outside directors bring an independent mind and external perspective to boardroom discussions. Furthermore, they argue that the presence of genuinely independent directors would also provide an important safeguard against the potential for managerial self-interest and weak execution of company strategy. Consequently, independent outside directors would be able to focus on improving corporate value rather than self-preservation and they would help reduce the practice of directors entrenching themselves in their positions without unbiased consideration of their company’s best interests and without meaningful shareholder involvement. (SPJ; September 2008).

"(...) Many fear that capitalism in Japan will become “obsolete” unless companies learn that external directors who ask tough questions can actually make them stronger. (...) " (Economist 3)

Hearing those voices on the merits of the Anglo-Saxon framework of corporate governance one could believe it is a panacea. But unfortunately it is also to be observed that most corporate governance reforms fail to solve governance problems and in some instances they even exacerbate them. The call for independent boards of directors and the corporate board to be composed of at least a majority of outside directors is the most popular governance idea in the past couple of decades, i.e. the latest mantra.

The assumption behind the idea is, that it would strengthen directorial spines to keep management in check. One should always keep in mind that these arguments were made on the basis of intuition rather than analysis. Research on that subject is very conflicting. There are even several studies out there showing that far from independent boards enhancing economic performance actually a negative correlation between the degree of independence and financial results could exist. (Cunningham; pp.194)(Romano)

Real world examples should caution too, when an Anglo-Saxon corporate governance framework is marketed as a magic bullet. Toyota, for example, adheres to the statutory auditor system, but is by far much more successful than Ford and GM. And Fuji Film, which even had a poison pill in place until recently, is still well and alive, while Kodak, longtime the poster child of corporate America, is not around anymore.

The abovementioned is far from saying that having some or many independent directors is never desirable. But there is no rationality for giving credit ipso facto to a company just because it does. The unanswered common sense questions concerning independent directors should be: 1) Who are these directors 2) What value do they add to the boardroom.

The key is to choose the right directors. Independent directors have to be chosen exclusively for their business savvy, interest in the job and owner orientation. You can put all the governance bells and whistles you want on a board, but if the CEO or other strong leaders lack integrity, you can be sure they will neither ring nor blow.

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Is A Formal Governance Framework Necessary?

The key problem in all governance structures is the size of the board. The larger the board is, the less manageable it is. Smaller board often translate into leaner management teams down the rank and faster decision making.

A similar problem is the number of other boards on which individual directors serve. A director's concurrent experience on two boards may add value to both. But how effective is a director who serves at dozen boards at once? Last but not least, a board filled with close personal friends of the CEO who lack solid business backgrounds is a red flag of caution. In its extreme one could ask the question if a formal corporate governance framework as such is really necessary. If a company needs these mechanisms to create an owner orientation maybe its valuation should be discounted proportionally. (Cunningham; pp.194)

Especially surrounding the Olympus and Daio Paper scandal in 2011 mainly foreigners (but also Japanese officials) became extremely vocal when calling for the need of more checks and balances in Japan's corporate landscape. But Japan’s corporate landscape has nevertheless changed in recent years. The portrayal of the Japanese system as a strict stakeholder capitalism with self-entrenched management has become outdated. Many decision makers in Japan are now aware of the importance and function of share ownership in Japan. Japan's legal framework and many corporate leaders have recognized that shareholders have legitimate legal and economic rights.

Nevertheless is it true that corporate Japan in aggregate has been slow to provide for those facts. When researching listed Japanese companies one still frequently encounters companies that are run as if management, not shareholders, were the owners. In many of those companies the stakeholder model of corporate governance has been misused by the management to defend the under-performance of their companies and to entrench themselves by over-emphasizing alleged stakeholder and “stability” concerns, while under-emphasizing improved profitability.

This approach gives management and those directors with ties to management little incentive, short of a financial crisis, to make the crucial decisions necessary to ensure the company’s success and enhance value for all stakeholders. While using the stakeholder as a defense for short-term under-performance may be reasonable in certain situations, but long-term under-performance will eventually result in a company’s failure. As a company’s failure harms all of its stakeholders, not just the shareholders, the interests of a company’s shareholders are frequently aligned with those of its other stakeholders. (SPJ; September 2008)

"Wakon-Yosai":  Combining The Spirit of Japan With Western Thinking and Learning

So what does the future might hold when it comes to reforming the corporate governance framework in Japan? In Japan there is the word "wakon-yosai", which means to maintain the spirit of Japanese people while embracing western thinking and learning.  (Aronson) And it appears that this will also be the approach when it comes to reforming the Japanese corporate governance system.

A hybrid system is very likely to emerge. It would combine some of the traditional strengths of Japanese companies with a more robust monitoring component by linking the information access of insiders and the independence of a limited number of outsiders. The development and spread of such a model among Japanese companies will be accomplished through means such as the establishment of a corporate code of best practice combined with a “comply or explain” requirement for listed companies. (Aronson)

 „ (...) LDP lawmakers are hoping to at least provide an outline of a new governance code that would bring Japan in line with international standards. While not legally binding, it would require companies to “comply or explain” - an approach common in Britain and other parts of Europe.(...).” (Japantoday)

Such spreading of best practices would represent a significant improvement in Japan’s corporate governance system and could be achieved without focusing exclusively on the structural issue of building up the number of independent directors. (Aronson)

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What Corporate Japan Needs To Do

Returning funds to the shareholders is one of the most important issue corporate Japan should have on its agenda right now. It is my point of view that the overhaul of the corporate governance system in Japan, which is definitely desirable to a certain extent, should be accompanied by a significant increase of funds returned to the shareholders.  

Reduce Excess Cash Holding

“ (…) The profits belong to the shareholders, and they are entitled to have them paid out within the limits of prudent management; (...) the earnings they receive in dividends are real money, while those retained in the company may or may not show up later as tangible values for the shareholders. (...)” (Graham; Intelligen Investor; pp.489)

Sound financial practices require that excess earnings not being efficiently utilized by a company should be returned to its shareholders. Being cognizant of the best means for excess cash deployment can dramatically influence profitability and efficiency measures, and will contribute to enhanced long-term shareholder value. Furthermore, it does not only benefit the individual shareholders, but rather the pensioners and the great country of Japan as a whole.

Concerning huge cash balances on the balance sheets of Japanese companies: As a value investor one buys into a company because he believes to have identified a low risk investment and is optimistic about the company’s future. There could be more risk-taking in those companies. Companies do not need to be run with cash equivalent to 100% of their market capitalization. It could be 30%. One would end up with leaner companies and a leaner capital structures. Those businesses would still be very successful and soundly financed.(EIU)

Increase The Return on Capital

Japanese companies recently have made some strides in improving ROE figures. More improvement could easily be accomplished. In such a low interest rate environment like in Japan the CFO has not to pull a rabbit out of the hat to reduce the WACC and boost ROE, as the cost of equity is well above the cost of debt. ROE could be doubled and WACC could be lowered through the restructuring of Japanese firm balance sheets. Studies exist that show the effects of a hypothetical one-time, all-cash dividend payout. The results suggest a noteworthy jump in ROE. Many Japanese companies would be able to double and in some cases triple their average ROE. (Brandes) A side effect of increased gearing would be an increase in operating efficiency ratios, through the increase of asset turnover.

Pay Higher Dividends Or Buy Back Shares

U.S studies verified that an increase in dividends per share proved to bolster share price performance on the long-run. Parallel analysis conducted specifically on the Japanese market suggested that dividend increases would have a similar effect as in the United States.(Brandes) Mr. Callon notes; "Mindful of some Japanese managers’ aversion to giving up cash to short-term investors at the expense of long-term goals, those companies should concentrate on increased stock repurchases. Dividends are a forward commitment which can be tough for companies to change. Share repurchases can be utilized much more flexible. In addition, when you repurchase stocks you strengthen the shareholder group. You actually create a longer-term shareholder base, which is a nice fit for Japanese companies with long-term orientations." (EIU)

In addition, dividend payout and share buyback programs limit the discretionary cash available to management, potentially spent on value destructive projects. A regimented payout policy offers a form of self-governing financial discipline and mitigates principle- agent problems. Thus, it serves as an automatic governance mechanism.

The optimal cash structure and its management is a constantly moving target and a dynamic process. It is influenced by a long list of financial criteria in addition to more abstract measure such as management's perceptions of business risk, the current market environment, as well as daily company operations. There is no research paper out there that could identify any common thread, which could clearly explain Japanese cash-rich companies' propensity to maintain super heavy cash balances. That begs the question of the mindful shareholder of such a company: "Are the management teams at these companies doing a disservice to the shareholders by maintaining persistently this high levels of cash?" (Brandes)

Finally and most importantly, in no instances should retained earnings used to disenfranchise ordinary shareholders by entering into cross shareholding arrangements intended to serve as takeover defense mechanisms. Shareholders are the true owners of the company and, by extension, its retained earnings. (SPJ; May 2009)

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Shareholder Activism in Japan: Status Quo and What the Future Might Hold

A lot of unnecessary harm between vocal shareholders and corporate managers was caused in Japan, especially during the heydays of "hostile" hedge funds activities.

The perception gap has significantly widened, where the majority of foreign investors see Japanese managers as a self-protecting, self-governing group with no external accountability and disrespect for legitimate shareholder interests. They wouldn't touch Japanese stocks with a bargepole, no matter how compelling the statistical readings of a company might be. On the other hand Japanese management, for its part, sees activist-type, and maybe foreign investors in general, as greedy and short-sighted and with the only intent on taking quick profits by making opportunistic demands.

Activists And Corporate Japan: The Dilemma

Both sides have a point and get it wrong at the same time. Heavy-handed, flat-footed approach by activist funds has made it more difficult for others to argue that companies should pay more attention to their shareholders. And Japanese companies, on the other hand, have neglected their shareholders for too long, with detrimental effects not only to the individual stockholders, but also to the Japanese pensioners and the country as a whole. Outright stupid remarks by the high ranked METI official Mr. Kitabata: “(...) to be blunt, shareholders in general do not have the ability to run a company. They are fickle and irresponsible. They only take on a limited responsibility, but they greedily demand high dividend payments.” (Economist 1) are not helping at all in a very important task, namely narrowing the abovementioned perception gap and getting the Japanese institutions and public aware of the importance of increased returns on equity.

The management in Japan has to learn that: "Broadcast criticisms (...) proxy battles, and various kinds of legal proceedings (...) vexatious to management (...) should be regarded as one of the drawbacks of being a corporate official (...) public must learn to judge such controversies on their merits (...)" (Graham; Security Analysis; p.514) But also one has to keep in mind that high rank corporate officers are severely underpaid in Japan and, given their duties and responsibilities, this has to be reversed to a certain extent. Hopefully an increase of executives’ pay in Japan will not turn into those remuneration excesses and perverse incentives prevalent in the west.

Japanese Management: The Excellent And The Disastrous

Let’s face it. Japanese management does excel in operational efficiency, in many instances even more so as in the west. But their actions are often suboptimal when it comes to allocating capital efficiently. In many companies financial efficiency is unincisive, with detrimental effects to the outside shareholders and the country's financial resources.

As Benjamin Graham puts it: "A company's management may run the business well and yet not give the outside stockholders the right result for them (...) efficiency confined to operations and does not extend to the best use of the capital. (...) efficient operation is to produce at low cost and to find the most profitable articles to sell. Efficient finance requires that the stockholders' money be working in forms most suitable to their interest. (...) a question in which management (...) has very little interest. (...) always want as much capital from the owners as it can possibly get, in order to minimize its own financial problems. Thus, the typical management will operate with more capital than necessary, if the stockholders permit it (...)" (Graham; Intelligent Investor; p.503)

Even worse! With the introduction of poison pills many managers made it plain clear that they regard stock prices as irrelevant. "It is true (...) company officers are not responsible for fluctuations in the price of its securities. But (...) very far from saying that market prices should never be a matter of concern (...) thoroughly hypocritical. It is wrong (...) marketability of securities (...) chief qualities. But (...) must presuppose not only a place where they can be sold but also an opportunity to sell them at a fair price. (...) responsibility of management to act in the interest of their shareholders includes the obligation to prevent (...) establishment of either absurdly high or unduly low prices for their securities (...) directors (...) duty of observing the market price (...) using all proper efforts to correct patent discrepancies, in the same way as they would endeavor to remedy any other corporate condition inimical to the stockholders' interest (...)" (Graham; Security Analysis; p.515) 

Corporate Japan: Listen To Your Shareholder Like You Listen To Your Customers

Japanese companies have an excellent practice of listening to customers’ needs and wishes diligently. Just like they try to incorporate those needs and wishes into their products on a regular basis, and thus increase operational efficiency, they could listen to the voices of savvy investors and create a culture of constant dialogue and incorporate sound ideas and recommendations by their shareholder into their corporate strategy. In short, Japanese management should launch a kaizen program of financial efficiency. (EIU) ”Here, the concept of kaizen and how it works for Japanese corporations is key. Kaizen is a commitment to make incremental improvements to products—whereby workers voluntarily commit to making those changes. “If you try to force things on Japanese management, you get an adverse reaction,” Mr. Wakita says. (EIU) 

This approach has already yielded some fruits in Japan. Carlyle Group, for example, sometimes spending years trying to convince the management of Japanese companies to work together to reap mutual benefit by raising shareholder value. Its involvement in Kito, which it helped to relist on the TSE, and Willcom (formerly DDI Pocket, a mobile-phone service provider). (EIU)

Other examples are Mr. Callon’s Ichigo, and Atlantic Investment in its efforts to placate the management of IHI, a heavy electrical machinery maker, before acquiring its shares. In Japan a buyer who acquires a large block of shares without the knowledge of the management already faces an uphill battle in trying to get managers to respond to their concerns. “Managers are offended if you buy without their knowledge,” says the principal at a major US hedge fund. “They think, why didn’t they talk to us beforehand?’” Consequently, managers will dig in their heels over suggested changes. “Things fall into place more naturally if you talk to the management first,” agrees Mr. Kojima of Keizai Doyukai (EIU) Through thoughtful tactics and close long-term collaboration and dialogue between investors and the management, the decision makers in such companies end up being educated, without investors shouting about it publicly (EIU)

The Japanese elite has to resist the temptation to lump together all activists and foreigners into the “bad actor” category. Because as Benjamin Graham put it: „ (...) Shareholders are justified in raising questions as to the competence of the management when the results (1) are unsatisfactory in themselves, (2) are poorer than those obtained by other companies that appear similarly situated, and (3) have resulted in an unsatisfactory market price of long duration (...) poor managements produce poor market prices (...)"(Graham; Intelligent Investor; pp.487) 

Especially the phenomenon of many securities in Japan trading below their net-current asset value for such a prolonged period of time should raise several questions to the management of such a company by their shareholders. In most cases capital markets are punishing this Japanese firms for the inefficient use of their capital, and to a lesser extent because of operational inefficiencies. If investors are only willing to pay less for a company than net assets, they are telling to the management that they are mediocre at best and that they are destroying value. (Benes)

"(...) a market price below liquidating value has special significance to the stockholder (...) some searching questions.(...) this situation must mean that either the market is wrong in its valuation, or the management is wrong in keeping the enterprise alive (...) the subject of liquidation must not be left without some reference to the employees' vital interest (...) seems heartless in the extreme to discuss such a decision solely from the standpoint of what will be best for the stockholder's pocketbook. Yet nothing is to be gained by confusing the issue. If the reason for continuing the business is primarily to keep the workers employed, and if this means a real sacrifice by the owners, they are entitled to know and to face the fact. They should not be told that it would be unwise for them to liquidate, when in truth it would be profitable but inhumane. It is fair to point out that under our present economic system the owners of a business are not expected to dissipate their capital for the sake of continuing employment. Whether a sacrifice of capital for this purpose is conducive to the economic welfare of the country as a whole, is a moot point also; but it is not within our province to discuss it here (...)" (Graham; Security Analysis; p.514)

"(...) possible moves for correcting market price (...) establish a dividend rate proportionate at least to the liquidating value (...) even if current earnings are insufficient, provided there are accumulated profits and (...) the cash position is strong enough (...); returning (...) cash capital as is not needed for the conduct of the business (...) done through a pro rata distribution (...) offer to purchase a certain number of shares pro rata at a fair price (…)” (Graham; Security Analysis, p.516)

In addition, the widespread adoption of poison pills in Japan has led to a negative takeover premium for listed company shares. “Normally there is a takeover premium because there is option value in that more value might be extracted from the assets should the firm be sold.” Benes surmises, “Here, there is a reverse premium because nothing can ever force existing management to sell a company to someone who can do more with it.” (Benes)

Consequently, a possible move for correcting the depressed equity market in Japan is the abolishment of such foolish devices like cross shareholdings and poison pills, when they are abused (which is the case in the majority of instances). The Japanese elite should recognize that those devices are counterproductive to the economic goals outlined in the financial “big bang” reforms and the governments' slogan “From savings to investments” as a means to help solve Japan’s fiscal problems. With such devices in place there is no way that Japan will become a financial hub in the Asian region, as it is intended by high ranked Japanese officials.

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Final Remarks on Shareholder Activism in Japan

Poor market prices attracts the attention of deep value investors, might they be active/ non-active institutions or individuals. The management confronted with activist shareholders should not be scared, but rather prepare carefully for meetings with them. Particularly listening to what long- term activist investors with a value and business owner orientation have to say about their financial efficiency and financial strategies, Japanese companies and the management will hear views that they may not have heard before.( IR Insight) It is to be expected that in most cases the dialogue between engaging investors and the management will be mutually beneficial. Even positive externalities for the country of Japan as a whole are very likely.

There are corporate managers who understand that, and who are addressing these issues quite actively. But there are quite a large number of companies that are not doing anything, and this is where shareholders must continue to push, which will create an opportunity to institute change. In order to do that, active shareholders have to bring more people on their side, especially from within Japan.

They have to persistently and patiently continue to spread their message. Also through the mass media in Japan, which still is negatively biased. Mainly, because they and the Japanese people in general distrust the capital markets. The same is true with funds and investors. The Japanese society tends to view them in a negative light. The root cause for that phenomenon is, that traditionally Japanese people respect hard, manual work, but despise people who move funds from one place to another. That type of thinking is still prevalent, but plain wrong in a postindustrial era .

Japan needs to correct that view towards the capital markets and investment in general. Japanese people need to understand that their welfare, especially after retirement, is incumbent on the markets doing well. Towards that end, the Japanese people need to be “elucidated” through the mass media. The role played by the institutional investors , especially from within Japan, and politicians is very large in this regard.  (Yano)

Unfortunately, the vocal investors in Japan are mostly foreign funds and institutions. Only a limited number of Japanese investors speak up. They are still way too silent. But investors form within Japan should do more because it is in the interest of Japan and its people. Instead they are leaving it to the foreign funds, which is quite regrettable. Without foreign pressure, it appears that Japanese people do not budge. And while this may be one of their characteristics, they should shed that kind of image and change. (Yano)

It is high time that the Japanese society came to realize that, in the great majority, it is their money which is at stake on the Japanese stock market. Engagement in the stock market by the Japanese and market developments are going to make a difference to how much they will receive in pension and retirement money.

There is an anecdote told by Mr. Callon. He recalls that he declined an invitation recently to appear on a TV show in Japan that planned to debate: “Why have foreign investors abandoned Japan?” He says they had got the wrong topic. “The key issue is not why foreign investors have abandoned Japan; it is why have Japanese investors abandoned Japan? If we cannot make this market attractive in any sort of permanent or stable way to local investors, we will not be able to make it attractive in any sort of permanent or stable way to global inventors, who don’t have any sort of priority commitment to Japan as a place to invest.” (EiU)



(The End)


Source:


Franklin Allen/ Mengxin Zhao; The Corporate Governance Model of Japan: Shareholders are not Rulers; May 13, 2007

Bruce E. Aronson; The Olympus Scandal and Corporate Governance Reform: Can Japan Find a Middle Ground between the Board Monitoring Modell and Management Modell; UCLA Pacific Basin Law Journal, Vol. 30, No. 1, pp. 93-148 (2012)

Japan’s zen style boardrooms – How effective are they? (Benes)

Brandes; Balance Sheet Cash: Unlocking Value in Japan; October 2006

Lawrence A. Cunningham; How to Think Like Benjamin Graham and Invest Like Warren Buffett; Mc Graw-Hill; 2001

Activist investors in Japan: Samurai v shareholders (Economist 1)

Message in a bottle of sauce: Japan's corporate governance is changing, but it's risky to rush things

(Economist 2)

Corporate governance in Japan: Back to the drawing board (Economist 3)

Benjamin Graham; The Intelligent Investor; Harper Business Essentials (2003); (with commentary by Jason Zweig)

Benjamin Graham; David L. Dodd; Security Analysis; Mc Graw- Hill 1934

Abe to urge companies to appoint more outside directors  (Japan Today)

How IROs in the U.S. Are Thinking about Activism: Implications for Japanese Companies (IR Insight April 2014)

Andreas Moerke; Corporate Governance in Japan; Paradigmenwechsel oder gradueller Wandel, Japan Aktuell; Oktober 2004

Robert Romano; LESS IS MORE: MAKING SHAREHOLDER ACTIVISM A VALUABLE MECHANISM OF CORPORATE GOVERNANCE; Working Paper 12/01 CERP

Steel Partners Japan (SPJ); Letters to Shareholders; September 2008

Steel Partners Japan (SP); Letters to Shareholders; May 2009

Miki Tanikawa; Mixing it up? Shareholder activism, corporate governance and the outlook for M&A in Japan; An Economist Intelligence Unitwhite paper 2008 (EIU)

Tomomi Yano; Closing Keynote Speech; Asian Business Dialogue on Corporate Governance 2007

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