For Japan Inc, discretion is the better part of activist valour

Kyushu Railway

25/06/2019 24:45

* Shareholder proposals to hit record high in 2019
    * Analysts see end of 'shareholder inactivism' as dialogue
grows
    * Behind-the-scenes negotiations are increasing
    * Long-only investors find more common ground with activists

    By Tomo Uetake
    TOKYO, June 25 (Reuters) - As Japan enters the busiest
period of its annual general meeting season, shareholders will
submit a record number of proposals to companies amid signs
activist efforts to instigate change among conservative
corporates are bearing fruit.
    But while overt and direct activism has stepped up, it's the
less combative behind-the-scenes lobbying, much of which takes
place before the public meetings are held, that is having some
of the greatest impact on governance changes.
    The most visible example of that change is scandal-hit
medical equipment maker Olympus Corp  7733.T , which will become
Japan's first major firm to give a U.S. activist fund a seat on
its board this month.  urn:newsml:reuters.com:*:nL3N1ZB1TO
    "Companies are much more willing to listen to shareholders
and take action in response to shareholder engagements," said
Seth Fischer, founder and chief investment officer of Hong
Kong-based hedge fund Oasis Management. 
    "You're seeing more independent directors on board, more
companies getting rid of their poison pills, more buybacks and
increased dividends. It's all happening."
    About two-thirds of firms listed on the Tokyo Stock Exchange
 .TOPX  hold their AGMs this week.
    Mitsubishi UFJ Trust & Banking says the number of companies
that have received shareholder proposals during this year's peak
AGM season is a record 54. That's more than last year's 42,
which was also a record, although all of those submissions were
ultimately rejected.
    Of note this year is the gradual withdrawal of some
proposals as activists confer privately with companies to
quietly get their demands met.
    Toshiba Corp  6502.T  is a case in point. In March, New
York-based King Street Capital Management sent a letter to the
CEO to propose a slate of directors to replace the Toshiba
board. It had previously intended to submit a shareholder
proposal for its AGM, scheduled for Wednesday. 
    But behind-the-scenes discussions with King Street and other
funds resulted in Toshiba announcing last month an overhaul of
its own proposal of board members to include more external and
even non-Japanese directors for the first time in 80
years. urn:newsml:reuters.com:*:nL4N22P14C
    "There is a lot more going on than the number of shareholder
proposals implies," said Kengo Nishiyama, a senior analyst at
Nomura Institute of Capital Markets Research. "I think
behind-the-scenes engagement will become the mainstream of
Japan's activism."
        
    CHANGING ATTITUDES
    Analysts say softer activism is one factor driving the shift
in companies' attitudes. Also helping are Prime Minister Shinzo
Abe's efforts to improve governance and a corporate recognition
that investors reward companies that shake up their management.
    Olympus' share price has climbed more than 40% year-to-date,
making it one of the top three performers in the benchmark
Nikkei average  .N225 . That in part follows its decision in
early January to grant San Francisco-based investment fund
ValueAct Capital a seat on its board. 
    In contrast, firms that outright knock back shareholder
demands are punished. On Friday, Kyushu Railway Co's  9142.T 
shares slumped 4.5% after shareholder proposals made by New
York-based Fir Tree Partners and supported by other firms were
rejected.
    That reality has prompted change.
    Sojitz Corp's  2768.T  CEO, Masayoshi Fujimoto, took part in
another first-of-its-kind shareholder forum, alongside activist
investors and a government representative, that the American
Chamber of Commerce in Japan held earlier this month.
    "We hope to attract more long-term shareholders," the
trading firm said. "For that, we think it's important to reach
out to foreign institutional investors."
    The shift away from a zero-sum game approach to activism
comes as funds see some change as better for shareholders than
no change.
    "Our aim is not to win the vote at AGMs. We are happy as
long as our portfolio company's value gets a boost in any way,"
said Tsuyoshi Maruki, founder and chief executive of Tokyo-based
activist fund Strategic Capital.
    Oasis's Fischer said his fund withdrew most of its planned
proposals before the AGMs after meaningful behind-the-scenes
engagement with companies.
    Some long-only investors also say they feel the activist
approach is now more in line with their thinking.
    "I noticed several cases where activist funds have made the
same demands as us. This is something new, something that hasn't
happened a year ago," said Archibald Ciganer, co-head of
Japanese equities at U.S. asset manager T.Rowe Price.
    Another sign of corporate change is an increase in firms'
share buybacks, which are expected to hit a record this year.
Share buybacks worth 5.57 trillion yen ($52 billion) have been
announced by 519 companies so far, much higher than the 2.84
trillion yen by 365 in the same period last year, according to
the data compiled by Citigroup.
    CLSA's Japan strategist Nicholas Smith says while public
rows at AGMs benefit few investors, confrontational engagement
still plays a role in driving change.
    "When having discussions, it's important to remind companies
that if they fail to be reasonable, activists do have other
measures they could employ," Smith said. "It is crucial that AGM
proposals do not become paper tigers."
    ($1 = 107.44 yen)

 (Reporting By Tomo Uetake;
Editing by Vidya Ranganathan and Sam Holmes)
 ((tomo.uetake@thomsonreuters.com; +81-3-6441-1645; Reuters
Messaging: tomo.uetake.thomsonreuters.com@reuters.net))