Shareholder Activism in Japan: Ready To Rumble Corporate Japan?
Shareholder activism in Japan is seeing a little renaissance. The Japanese activist Investor Yoshiaki Murakami is a familiar player who was very present between 2000 and 2006. His approach to activism is rather hostile.
And he is back playing hardball on corporate Japan with the investment vehicle C&I Holdings Co., headed by his 27-year-old daughter Aya Murakami.
The Murakamis: An Activist Dreamteam?
Yoshiaki Murakami is Japan’s most prominent activist investor, not for a small part because he was convicted for insider trading in 2007. He was sentenced to two years in prison, which was suspended on appeal. The scandal ultimately forced him to shut- down his multibillion-dollar fund. Murakami itself denies any wrongdoing. And not a few observers of this insider trading case believe that the charges against Murakami were politically motivated.
Murakami, who now lives in Singapore, is a former Ministry of International Trade and Industry (MITI) official. After he ended his career at MITI he founded M&A consulting, usually known as the Murakami fund. Leading Japanese business establishments funded the vehicle. It is said that Yoshiak Murakami has been deeply influenced by Robert A.G. Monks who is a well-known U.S. American shareholder activist. He started the LENS fund and Institutional Shareholder Services in the U.S. and helped set up the Hermes fund in the U.K. It is reported that Murakami met Monks in 1999.
In 2000 Murakami gained fame by being the first Japanese investor undertaking a hostile takeover bid and proxy fight in Japan. The bid was against Shoei, a former textile company. It was trading on the stock market around liquidation value, hence was a classic Graham and Dodd net-net stock. His hostile bid for the company did not succeed. But Murakami was not discouraged by this failed attempt. In 2001 he launched a campaign against Tokyo Style where he initially acquired 5.77% of the shares outstanding. The following proxy fight failed again. However, he succeeded in getting the firm to increase its cash dividends and to engage in share buybacks. Murakami's most prominent and disastrous battle was over Nippon Broadcasting System, which let to the abovementioned condemnation.
Since 2015 his daughter Aya Murakami is heading the new investment vehicle of the Murakamis. She graduated from Keiō University and later worked at Morgan Stanley MUFG Securities. She is on record saying that Japan now is ready for her father’s ideas: "Initially it was too early for his thinking to be accepted in Japan. Now the times are catching up (...) Japan is still a developing country compared with overseas when it comes to its listed companies."
Shaking Up Corporate Japan: C&I’s Targets And Issues Involved
The targeted companies are cash rich and low priced stocks. Most important to C&I is the P/B ratio. On this measure many bargains can be found in Japan. C&I concentrates on firms with a P/B ratio below 1. When initiating a position they usually ignore any corporate governance issue within the targeted companies. Actually, when looking for those kinds of bargain stocks C&I often ends up being involved with companies showing a weak corporate governance structure. Later on C&I pushes aggressively for increased returns to shareholders, the sale of businesses units, M&A and a reshuffle of the board of directors. What differentiates C&I from other activist funds in Japan is the aggressiveness and their persistence when encountering adversity.
Although Aya Murakami is excited about the changes in corporate Japan following the reform of the Corporate Governance and Stewardship Code, she is cautioning that: " In society as a whole, though, I do think that there’s still considerable resistance to the idea of making profits by investing. The tendency to look askance at making money or pursuing profits continues to have a certain hold. For example, since the Toshiba accounting scandal came to light, people have blamed the malfeasance on pressure to improve current profits. But the problem wasn’t in seeking profits. Every chief executive seeks profits. It was in the violation of [accounting] rules."
Aya Murakami also points to the phenomenon of high retained earnings in Japan's corporate landscape. The resulting high cash balances make an international comparison of return metrics not feasible. If you look at return on equity (ROE) the figure for Japan is only about 7%, against 15% for the United States. Aya Murakami says that: " (...) the reason for this big difference is the size of companies’ retained earnings. If these internal reserves were slashed, the Japanese figure would become comparable to what we see in the United States. (...)“ Concerning the most undervalued stocks trading on the Japanese stock exchanges, the J- Nets, she notes: " (...) Most of the companies that have especially large levels of internal reserves are ones with cross-held shares. Almost all of the companies with P/B ratios like 0.4 or 0.5 have net cash exceeding market capitalization, along with substantial real estate holdings and cross-held shares (...)."
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Kuroda Electric: Another Murakami Battle That Failed
After several years of abstaining from shareholder activism in Japan, in June Murakami got active once again. In the middle of this year C&I was targeting the Osaka based company Kuroda Electric, one of Japan’s electronic parts trading company, listed on the First Section of the Tokyo Stock Exchange. The Murakami family and associates owned around 17 percent. C&I asserted that although the operating business is run well the management lacks a sense regarding capital efficiency. A prime example is the convertible debt issue of 2012. The management claims that with the convertible bond the company does not have to pay as much interest. Aya Murakami disagrees and points to the fact that the shareholders ultimately have to pay a very high price. The convertible had an unduly low exercise price that would dilute existing stockowners’ holdings heavily.
In order to increase shareholder value in the short/ medium term, C&I demanded to distribute all the company's profits to shareholders in the next three years. In addition, it pressured the company to appoint four new directors, including Yoshiak Murakami, to its six-member board at an extraordinary meeting.
To have the proposal pass C&I needed the approval of a majority of voting shares. Aya Murakami thought that they would have a good chance, as foreign investors roughly held 49 percent of the company’s shares. But U.S proxy advisers were divided about Murakami's proposals. ISS recommended the approval by claiming that it would provide new insights on industry conditions and balance sheet management currently lacking at Kuroda. Glass Lewis & Co., on the other hand, told its clients to reject them. They contended that Murakami had an "unconvincing case" for modifying the board, and the proposal of returning all profits to the shareholder is a rigid and extreme dividend policy.
Kuroda's board called the Glass Lewis & Co advice "fair" and urged its stockholders to refer to it when voting.
The proxy fight was defeated with about 60 percent of shareholders voting against it. It is said that an important reason for the failure of the proxy fight was a statement from employees opposing C&I's demand. It persuaded many shareholders not to follow the recommendation by ISS and not to support C&I. Aya Murakami is claiming evidence that the statement was drafted on orders from the company’s chairman and president. Thus, it encouraged shareholders to exercise their voting rights in a way that would benefit the company’s management. Aya Murakami commented that: "Using a fabricated document to influence voting in the hallowed forum of a shareholders’ meeting is a terrible breach of the rules. It won’t be possible to improve Japan’s corporate governance if this sort of behavior is allowed to stand, so we intend to pursue this matter according to the proper procedures."
Other companies the Murakamis have an interest in are Accordia Golf Co., Sanshin Electronics Co. and Excel Co.,
Activism in Japan: Take It on Woman of Japan
Roughly a year and a half has gone by since the Stewardship Code was introduced. The Corporate Governance Code was launched about half a year ago. So far the effects are encouraging. Foreign and local activist funds have stepped up their involvement and efforts in Japan to raise the awareness of Japanese managers regarding capital efficiency and increased shareholder value. Maybe the introduction of the Stewardship Code and reforming Japan's Corporate Governance System has been Abe's most successful structural reform so far.
Nevertheless, if Japan really wants to attract more foreign or local interest in its stock market, and shift the financial system further towards direct financing, still a lot has to be done. Raising funds through direct financing presupposes the existence of a more efficient stock market where share prices reflect better the fundamental reality. Still a great number of Japanese corporations and managers are failing completely in this respect. They are disinterested in the importance of capital efficiency and in mending the undervaluation of their shares.
I am on record arguing that the friendly approach to shareholder activism in Japan is the more efficient one. Apparently, the Murakamis see it differently. But so far not one of their proxy fights has succeeded. As Japanese they are certainly better in reading the air than I am. Maybe this time it is different, and Japan is ripe for hostile activism. I am still highly skeptical though, but I might just be ignorant.
Nevertheless, am I positively surprised that activism in Japan is entering a new stage. One where not only young Japanese tackling old Japanese, butyoung and smart Japanesewoman shaking up corporate Japan's old boardrooms.
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