Tuesday4 February 2020 ★ FINANCIAL TIMES 9

F T B I G R E A D. JAPAN

Activism is transforming Japan — so long an afterthought for global investors — and forcingsome

sectionsof its risk-averse corporate world to overhaul their views on the role of shareholder capitalism.

By Leo Lewis and Kana Inagaki

nobu Fujimoto, a partner at law firm

Nishimura & Asahi, who specialises in

shareholder activism. “But the CEO can

sometimes use the letter from a share-

holder as an excuse to make a difficult

business decision.”

‘Poison pill’ defence

There are, however,signs of a growing

backlash from some companies. To

thwart an approach from Japan’s most

famous family of shareholder activists,

the Murakamis,Toshiba Machine s try-i

ing toresurrect a “poison pill” defence —

a legal mechanism used by boards to

fend off an unwanted takeover bid.

It has led some to fear that other compa-

nies will be dusting off their poison pill

plans.

“Despite a recent decline in poison pill

measures, there is concern that one

major hostile incident would trigger an

extreme reaction,” says Takeyuki Ish-

ida, head of Japanese research at ISS.

Another concern for investorsis a n

amendment to the Foreign Exchange

and Foreign Trading Act — the final

details of which have yet to be

announced — that would controlover-

seas investmentsintocompanies whose

operations are deemed to have a

national security dimension. o qualifyT

for exemptions from what critics have

dubbed an “anti-activist bill”, foreign

investors must agree not to propose the

sale or transfer of business units at

shareholder meetings, or place their

own or related people on company

boards — thingsthat arebread and

butter to activist investors.

Others worry that the governance

revolution will simply run out of steam

— it is now less visibly backed by Mr Abe

as his focus has turned to other issues in

what may be hisfinal year in power.

Despite all the progress, says UBP’s

Mr Khan, about 30 per cent of Topix 500

companies have not adapted to the new

environment at all. “They are acting as

if nothing has changed,” he says. “They

have high cross-shareholdings and

entrenched management. In my view

they are uninvestable.”

But Seth Fischer, chief investment

officer at Oasis and architect of the

campaign against Tokyo Dome, says the

window is still wide open. “Japan is going

through a rapidly accelerating transition

towards becoming a dramatically more

shareholder-friendly investment

universe. t’sI the exact opposite of the

discussion in the US with Jamie Dimon.”

Beer battle: Kirin v FP

UK-basedFranchise Partners aunched al

campaign late last year to persuade the

Japanese brewer to focus on making beer

instead of forays into biotechnology,

pharmaceuticals and cosmetics. Instead

of seeking buybacks or raised dividends,

FP pushed for wholesale strategic change.

Kirin’s recent shift to the healthcare and

pharmaceuticals business follows a

pattern of Japanese groupsdiversifying

to offset a chronic decline in the domestic

beer market, which peaked 25 years ago.

F

or decades,Tokyo Domehas

been a centrepiece of theJapa-

nese capital: the world’s larg-

est covered baseball stadium

is home to the country’sbig-

gest team. The site boasts a theme park,

a 1,000-room hotel and the world’s first

spoke-free Ferris wheel. Its revenues

have been tepid and its share price flat

for six years. Yet no one seemed to mind.

But last Friday,managementof the

84-year-old stadium operatorwoke to

find thatOasis Management, its second-

largest shareholder, had almost doubled

its staketo 9.6 per cent, and that it really

does care about Tokyo Dome’s sluggish

performance. A pugnacious activist

investor which has taken onNintendo,

Panasonic nda Toshiba n the past, iti

issueda fabulously detailed 85-page

presentation covering everything from

the beer service in the stadium to the

state of the hotel curtains— and urgeda

series of changes hat would, says Oasis,t

unlock vast profit potential.

Tokyo Dome’s management may feel

under siege, but after a record year for

activist campaigns in Japan,it is not

alone.From DIY centres to TV broad-

casters and blue-chip tech giants to

robot makers, crematoriums and pro-

ducers of fire hoses, companies are

being forced to publicly engage with

activists at a frequency and intensity

Japan has never seen before.

Controversialtactics including cam-

paigns aimed at shaming companies

into action are being deployed by sea-

soned global activists likeElliott Man-

agement nda Third Point. Hostile take-

over bids are on the rise. An even greater

number of confrontations, sayadvisers,

are happening behind closed doors.

In a market where about half of

the 3,700 listed companies re tradinga

below book value, activists ee manys

more opportunities.

Global activist funds, emboldened by

state-backedprogress on corporate gov-

ernance, a mounting pileofscalps and

record years of share buybacks, have

made the Tokyo stock market, for the

first time, their highest priorityoutside

the US, according to Lazard research.

TheLondon Stock Exchange’s first

initial public offering of 2020will bethe

Nippon Active Value und — a £200mF

bellwetherfor the effectiveness of activ-

ism in Japan.

“In a world of historically low interest

rates there are few developed places

thatfeature equities trading far below

their intrinsic values,” says US investor

James Rosenwald, who will oversee the

fund.

Activism has transformed the Japa-

nese market nto one of its morei poten-

tially lucrative stories. And that has put

scores of companies on notice.When US

fund Third Point targetedSony ast year,l

overs can often unlock value, and that is

why it is becoming an option even for

blue-chip companies,” says Kunihiro

Mita, chief executive of Mita Securities,

a midsized brokerage near the Tokyo

Stock Exchange which has made its

namein hostile bids in recent years.

“Activists are becoming more sophis-

ticated and their proposals are also

becoming more rational so companies

campaigns, each calling on the media

group to offloadnoncore holdings to

improve returns for shareholders.

“If you are going to be part of this

whole corporate governance move-

ment, you can’t really ignore companies

like TBS. It’s such an egregious abuser of

balance sheet,” saysJoe Bauernfreund,

chief executive ofAsset Value Investors,

whichin 2018 called onTBS to sellits

large stake in chipmakerTokyo Elec-

tron. The proposal was rejected, but

TBS did subsequently sellsome shares

in Tokyo Electron, leavinginvestors

critical ofthe pace of its move.

Mr Bauernfreund — whose UK-based

fundhas $505m invested in 30 Japanese

companies — says sometimes the inten-

tion is to spark a reaction. “We’re not

coming in and asking for radical

changes. But if we can ask [companies]

to take steps in the right direction and

they benefit from a rising share price on

the back of that, perhaps that encour-

ages them to do more,”he says.

Companies’ reactiontoactivism has

moved on from the blindpanic of a dec-

ade ago. Many arepragmatic enough to

engage. Bankers say company manage-

ments are becoming more attuned to

shareholdercomplaints. In Sony’s case,

the demand from Third Point was a pop-

ular one for sprawling Japanese groups:

to simplify its business line-up so inves-

tors can better value the company.

“We never thought the proposal [to

offload the image sensor business] was

strange,” says Sony’s Mr Yoshida, noting

thatthe likes of Toshiba andIBM adh

taken similar steps. “It’s a question we

need to ask ourselves all the time.”

While rejecting Third Point’s main

proposal, Sony did subsequently sell

its stake in medical-equipment maker

Olympus nd pulled the plug on itsa

paigns in 2019 were almost five times

the tally four years earlier.

The quantitative change is important,

sayactivists and the companies facing

them down, but last year also saw the

start of a clear qualitative change. In the

first phase of activism’s rise in Japan,

between 2015 and 2018, the campaigns

were quite narrow in their ambitions.

They would concentrate on hoarders

of cash, hoarders of other companies’

stock or generally flabby balance sheets

and would mostly demand share buy-

backs and raised dividends.

These campaignsare now increas-

ingly focusedon the kind of big strategic

changes that, they argue, could perm-

anently unlock value.

Zuhair Khan, a senior portfolio man-

ager at Union Bancaire Privée in Tokyo,

says there has been a gradualimprove-

ment in governance atmany Japanese

companies. A 2015codehas given inves-

tors a state-endorsed language to argue

for improvements andforced company

managements to accept that outsiders

matter, says Mr Khan.

There has also been a realisation

among investors of the potency of their

votes, which could in theory oust the

entire board of a Japanese company at

an AGM or force an extraordinary

shareholder meeting — the most feared

scenario for any chief executive who

does not want to be humiliated in front

of investors.

The power of the EGMwas illustrated

last year when a boardroom crisis at

Lixil, a home fittings company, forced

shareholders to vote between compet-

ing slates of board nominees. Afterthe

abrupt ousting of its chief executive,

Kinya Seto, a group of long-term Japa-

nese and foreign investors demanded

the removal of his successor through an

EGM. Mr Seto was eventually restored

to his position after shareholders

backed his proposal for a new board.

This example reflects apermanent

shift in the balance of power, says Mr

Khan. “Lixil sent a message that man-

agements have to court shareholders for

their vote. It used to be about sharehold-

ers saying, ‘Please give us more access’.

The environment has changed. Increas-

inglycompanies [are] chasing the

shareholders.”

Equally important has been a sharp

rise in hostile takeover bids — an

extreme rarityin Japanjust a year ago.

The increasein both accountability

and hostile takeovers has been influ-

enced by the 2014 introduction of a

stewardship codethat compels Japan’s

biggest institutions from pension funds

to banks and insurance groups to

approachactivism and hostile bids as

investors with fiduciary duties rather

than as cosy old friends of the compa-

nies whose stocks they hold.

“Japanese companies are starting to

realise that hostile or unsolicited take-

‘The influence of Japanese

banks over corporations

is waning. Equity

investors are becoming

more influential’

‘Activism is going to

increase in Japan because

you are looking at a

shareholder base that

is more global’

Tokyo Tower:

foreign activist

investors are

flocking to

Japan’s capital

in an effort, they

say, to unlock

the value of

some of the

country’s

leading

companies

KeithBedford/Bloomberg

Activists take on Japan Inc

19

Formally launched

activist campaigns in

2019, almost five

times the tally four

years earlier

60%

Rise in Sony share

price since Third

Point launched its

campaign for

strategic changes

£200m

Likely size of Nippon

Active Value Fund to

float on the London

Stock Exchange

demanding it focus on being an enter-

tainment powerhouse, the pressure was

such that the Japanese company’s chief

executive,Kenichiro Yoshida, penned a

seven-page letter explaining why the

groupwould not spin off what Third

Point founderDan Loeb alled itsc

“crown jewel” image sensor business.

Last yearJamie Dimon, chief execu-

tive atJPMorgan hase, appeared to callC

timeon the priority ofmaximising

shareholder profits, declaring the need

to give equal weighttoissues like the

environment and workers’ rights.

Yet in Japan, 2019 was the year the

corporate world finally woke up to the

importance of shareholders.“We think

that activism is going to increase in

Japan because you are looking at a

shareholder base that is more global and

taking a more global approach,” says

Rich Thomas, who leads Lazard’s share-

holder activism practice outside the US.

Record breaking year

There were 75 ctivist “events” —a

defined as formal demands on manage-

ments by shareholders — in Japan last

year, with$4.5bn incapital deployed.

The 19 formally launched activist cam-

need to engage with them even if they

don’t want to,” Mr Mita adds.

Curtailing a cosy relationship

This remaking ofJapan Incrests on a

critical structural shift: the changing

role of banks. In the postwar period,

conglomerates includingToyota nda

Toshiba expanded on the back of lend-

ing from banks, which in turn bought

shares in their clients and dispatched

executives to join their boards.

Those dynamics have changed drasti-

cally, with the advent ofnegative inter-

est rates and high liquidity where com-

panies can easily turn to equity and

bond markets to raise money. The gov-

ernance push under Prime Minister

Shinzo Abe has also created strong pres-

sures for banks to unwind their cross-

shareholdings, and for companies to

disclose and explain their strategic

stockholdings.

“The influence of Japanese banks over

corporations is waning,” says Haruo

Nakamura, deputy president and head

of investment banking at Mitsubishi

UFJ Morgan Stanley Securities. “Equity

investors are becoming more influen-

tial.. .but Japanese management are

not deeply familiar with how they

should manage [their] companies to

align the interest of equity investors.

That’s the challenge they face.”

Critics argue thatold loyalties have in

the past allowedcomplacency. Higher

governance standards increasingly

mean that those firms with an ineffi-

cient balance sheet are being punished

with lower share prices and facebecom-

ing targets for activists.

In the past two years shares inTokyo

Broadcasting System ave fallen 27 perh

cent and the company has been on the

receiving end of two separate investor

struggling PlayStation Vue video

streaming service. Its share price has

risen 60 per cent since Third Point’s

campaign was revealedin April 2019.

Occasionally, pressure from share-

holders has given chief executives cover

to take painful decisions.

“There are usually no big surprises in

letters from shareholders since a CEO

knows the business better,” says Yoshi-

Robot wars:

Toshiba Machine v Murakami funds

In January, a group of funds tied to

Yoshiaki Murakami, Japan’s most famous

activist, launched a hostile takeover bid

fora formerToshiba subsidiary. The

battle stems from Toshiba Machine’s

decision to sell its stake inNuFlare ot

Toshiba — once its parent company —

despite the fact that Hoya made a higher

offer. Toshiba Machine saysit may trigger

emergency anti-takeover measures to

block the unsolicited ¥25.9bn bid.

Baseball saga:

Tokyo Dome v Oasis Management

Oasis last week went public with its

criticism of the way Tokyo’s biggest

baseball stadium is run. It launcheda

campaign withdetailed analysis ofhow

the companymanages its stadium, theme

park and hotel and suggests a range of

upgrades that, Oasis claims, could almost

double net income if implemented in full.

Tokyo Dome says it plans to issue a

written response to Oasis, now its

second-largest shareholder.

FEBRUARY 4 2020 Section:Features Time: 3/2/2020- 18:38 User:alistair.hayes Page Name:BIG PAGE, Part,Page,Edition:LON, 9, 1