In Japan Inc, activist investors come in from the cold

JSR

21/04/2021 03:30

* Activists have recently become more influential at Japan
Inc
    * Olympus's partnership with ValueAct helped rally its share
price
    * Activists say many Japanese firms unresponsive to
shareholders
    * Activists focus on strengthening governance, boosting corp
value

    By Makiko Yamazaki and Noriyuki Hirata
    TOKYO, April 21 (Reuters) - Yasuo Takeuchi remembers the
horror he felt in 2017 when, as chief financial officer of
Japan's Olympus Corp  7733.T , 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  .TOPX .
     ValueAct declined to comment on the story.
    
    'MORE CONVINCING'
    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  4185.T ,
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  6502.T  won
approval at a shareholder vote, the first time at such a high
profile company in Japan.  urn:newsml:reuters.com:*:nL1N2LG041
    Still, experts note it is too early to say shareholder
activism has taken full root in Japan.
    Sony Group's  6758.T  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."

 (Reporting by Makiko Yamazaki and Noriyuki Hirata; Editing by
David Dolan & Shri Navaratnam)
 ((Makiko.Yamazaki@thomsonreuters.com; +81-3-4563-2805;))