Introduction
Prime minister Abe’s third arrow, which should be better described as a fusillade of thousand needles, is hitting some targets. So far the reforms are mainly shaking up the cosy atmosphere in corporate Japan’s boardrooms. Also it is giving the land of the silent shareholders a so much needed wake- up call, and activism in Japan is seeing a little renaissance once again.
In general activism comes in many flavours. Strategies activist investor deploy can be relationship-/ active value- oriented, “friendly, constructive and it can be hostile.
All those strategies are followed in Japan. But, as I wrote before, foreign activists have become wary of the hostile approach in Japan, as it backfired on them badly between 2002-2008. In that time frame only one proxy battle at a listed Japanese company succeeded. Steel Partners was able to oust the board of Aderan’s, a seriously troubled Japanese wig maker,
So I was surprised when I read about a battle in a Japanese board room I had never imagined would be possible in Japan. Not only was it young Japanese against old Japanese. It was even a greater spectacle! The founding father of the company against his daughter. Eureka! I am sure Peter Cundill (R.I.P) would have enjoyed watching the spectacle as much as I did!
Oh boy was this battle fought. No dirty trick, slander and insult was omitted by the father to stop his daughter doing the right thing. Namely saving the company from going the path of irrelevance and demise. And it was fought publicly. The Japanese financial media, yellow press and public was watching and commentating the family drama with frisson.
The Targeted Company
The object of covetousness? Otsuka Kagui Ltd. (JP:8186) a Japanese furniture chain. The corporation focused exclusively on the high- end business. Especially 2008 was a tough year and the company had to book severe losses. Rivals, such as Nitori, Muji and IKEA, were offering cheaper items and increasingly were eating away market share from Otsuka Kagui.1 Not only were those stores offering cheaper furniture than Otsuka, but also a unified aesthetics. All their merchandise was designed and made for them in accordance with an integrated in-house style.3 Otsuka, on the other hand, bought furniture exclusively from various wholesalers and manufacturers.
But more importantly, the service policy at Otsuka Kagui was rather odd. When customers came to an Otsuka showroom for the first time, they had to fill out a form and than became members. Only after this procedure were they entitled to a guided tour around the store.3 A commentator on the internet described his experience in the store as one of his weirdest and even as scary. “All the salespeople in black suits and the questionnaire you have to fill in before you can have an escorted tour around the shop make it feel more like a religious cult than furniture shop (..) it was creepy and uncomfortable.”7
The father’s idea was based on the assumption that buying furniture is a once-in-a-lifetime event.
Traditionally, when two people in Japan marry, the family of the bride buys all their furniture. In this context a place like Otsuka did make sense, as it potentially helped couples coordinate their purchases.3
But is this concept applicable to newlyweds today? And are not fewer and fewer Japanese getting married?
Kabuki Theatre in a Japanese Board Room
So who are the protagonists of the spectacle in a Japanese board room? Well at the left side of the stage you had Mr. Katsuhisa Otsuka, the company’s 71-year-old founder. On the right side was Ms. Komiko Otsuka his eldest daughter at age 47, which worked as a banker and consultant before joining the family controlled business. In 2008 the company was making severe losses and Mr.Otsuka handed over the presidency to his daughter in 2009.
So far so good. The only problem was that the daughter was much more rational and realistic concerning the state of affairs the company was facing than her father had wished for. On top of that she was determent to turn things around, even when she had to break with certain traditions in the company. Kumiko Otsuka was convinced that the company’s business strategy was outdated. She wanted to discontinue this practice of membership and guided tours. She wanted to make Otsuka’s showrooms open to the general public for browsing, with no memberships and no sales staff tagging along unless the customer specifically asks for help.3 In addition did she renovate the shops and opened new ones offering cheaper furniture. In two years she managed to turnaround the operations of the company.6
But not respect and admiration did Ms.Otsuka get from the old patriarch. No! She was dismissed by him as president of the company after a pretty successful five-year tenure and her father enthroned himself as president of the company once again.
Apparently her father was aggrieved by the strategic shift his daughter undertook. He still believed that it was the old system that differentiates the Otsuka brand from the other furniture shops and is especially appealing to affluent consumers. He feared that by changing the service approach the company would just be another furniture store.3
After consolidating power to himself again, not surprisingly, the father became somewhat autocratic. 4 In addition did the company logged in its first loss in four years for the quarter ended September 2014. Subsequently, the patriarch started to attract further resentment. This time from the board of directors of the company.2
Current board members bemoaned that he was not listening anymore. What disturbed the majority of the board members especially was that Mr.Otsuka did not provide any explanation concerning his business plan, which purportedly contained excessive advertising expenditures. Finally, the board of directors had enough. They convened a meeting in January 2015 and a majority of the members, including all external members, resolved to re-appoint Ms.Kumiko Otsuka as president and not to re-nominate Katsuhisa Otsuka in the new board slate proposed for the upcoming shareholder meeting. 4
After being dismissed as president, Katsuhisa Otsuka, who was also the Company’s largest shareholder with an 18.88% interest, started to submit a set of shareholder proposals to entirely replace the management’s nominees of board of directors and statutory auditors at the shareholder meeting. 5 Furthermore, he was proposing to nominate five independent directors. The move by Mr. Otsuka was more than odd. He was still a director of the board and for a director to submit a proposal as a shareholder without much discussion at the board is rare.
The pending proxy battle, in which Ms. Otsuka was also in favor of independent directors on the board, split the Otsuka family in two different camps. According to news reports, Katsuhisa Otsuka was supported by his wife and eldest son, who were also major shareholders of the Company. Kumiko Otsuka was supported by her younger siblings, including Ms. Maiko Otsuka, who served as the representative of the family’s investment vehicle, which holds a 10.21% stake in the Company. 4 Furthermore was Ms. Otsuka supported by Brandes Investment Partners, which were holding 10% of the shares out.
From now onwards the dispute and its financial effects had drawn attention away from what it was all about — namely, a change in the business strategy and corporate governance issues.
The fight became personal and very dirty. Furthermore, the fight between father and daughter started to put the company under intense media scrutiny, mostly within Japan. The family drama left the Japanese public holding its breath. The national attention was flabbergasting, with near-daily updates in local media, especially after Mr.Otsuka called his daughter “a bad child” and referred to her actions as “terrorism” during a news conference on Feb. 25.2
While the father tried to make the coming battle personal by telling reporters at a press conference that the problem stemmed from a relationship issue between a father and his daughter, Ms. Ohtsuka stayed rational. For her it was not a family issue, but rather a conflict about the corporate governance between the board and a major shareholder.2
Fortunately the story has a happy end, at least for the minority Shareholders. Kumiko’s proposal won 61 percent of the vote on March 27, 2015.
Conclusion
Firstly, the battle shows the difficulty in running a family business in Japan. In other countries, where entrepreneurial spirits are well entrenched, an owner may sell a company after it develops and he starts a new business. In Japan though selling a company is most often not regarded as an option. Often companies are regarded as an extension of the family. And one would not sell its family neither.
Thus, this brings forth the problem of succession. It is said that the transformation from a founder to the second generation to be the hardest part in management of a family business. Business management as an entrepreneur and as a manager is totally different. Basically one needs a manager that is in a position that enables him/her to see the founder’s perspective but apply more general management principles.5 Not many managers that have those qualities are out there.
Furthermore, serious conflict of interests can arise when a director of a company is also a major shareholder. Especially when those person follows an autocratic leadership style.
Finally, the story is not short of irony. The founding father did not care at all about the minority shareholders during his tenure. He saw the company as his property and acted accordingly. Suddenly he finds himself in an awkward situation where he needs the support of minority shareholders, not realizing that he is having the last breath and the future of the company is in the hands of his daughter. A stubborn, angry old man that very likely not drawing the right conclusion even after having lost the proxy fight.
1 The Japan Times↩Otsuka Kagu president prevails in bitter family feud
2 The Wall Street Journal↩ Daughter Wins Family Fight Over Control at Otsuka Kagu
3 The Japan Times↩ The Japan Times - Outdated Otsuka Kagu business model is at the root of family feud
4 Glass Lewis↩ Proxy Season Insider: Otsuka Kagu Limited
5 WSJ Japan Realtime↩ Kumiko Otsuka Says Corporate Governance at Heart of Dispute With Father
6 Japan Markt↩ Möbel-Seifenoper: Peinlicher Vater gegen schlaue Tochter
7 Japan Today↩
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