Are Japanese corporations receptive towards shareholder activism?
Japanese corporations have a long tradition of maintaining status quo, and not make drastic changes to their senior management, unless there are forced circumstances, such as corporate scandals we’ve seen in last year’s Olympus scandal where the former CEO, Mr. Michael Woodford, has successfully defended his resignation, and whistleblowing the amount of alleged fraud that was going on before he took the helm. Other issues including the lithium batteries that caught fire on board Boeing’s new 787 passenger aircraft in early January 2013 were made by a local Japanese battery manufacturer, GS Yuasa (6674), and were not immediately rectified by senior management before they were installed in the aircraft.
These corporate incidents have exposed the vulnerability of Japanese corporations in terms of promoting their good corporate image, and as well as serving as a major Japanese hallmark of product/service excellence known in many parts of world. Most of the senior managers do not immediately respond to these alleged incidents, until there has been a public outrage, or government intervention in forcing the company to admit their faults. Some executives have to be forced to resign and to publicly bow their heads in front of the public. In the midst of all these corporate scandals, there could also be cover-ups being used by senior management in order to preserve their board seats. This could be an important issue when it comes to corporate transparency and accountability towards investors, and the public. There appears to be lack of initiatives, and group think being actively applied so to speak among senior executives and the Board, and it has not been a reassuring tone from the top brass when it comes to managing its investor and public relations through open dialogues among the senior executives and investors.
Another incident that highlighted the lack of accountability is the Fukushima nuclear meltdown on March 2011 as a result of the massive tsunami has also exposed the various issues surrounding the management of the nuclear facility by Tokyo Electric Power (Tepco). Inspections were not adequately performed, and management did not deal with the issues pre and post disaster in a forceful manner that might soften the public and investor discontent over the handling of the entire issue. This incident has exposed major vulnerabilities among senior executives in their bid to ‘dodge’ the issue and prefer to deal with it privately, rather than being frank and open towards the greater communities that were impacted by the disaster.
Recently, there has been an active promotion of boardroom change and shareholder activism, following the successful early January 2013 election of the current Liberal Democratic Party (LDP) government led by Prime Minister Shinzo Abe. The Abe administration is seen as being proactive in revitalising the Japanese economy through its various rounds of fiscal and monetary stimulus being implemented across the board. Aside from the political and economic changes implemented, there has been a revival of attention and scrutiny that were centred on Japanese corporations through increasing shareholder participation and emphasis on results that will ensure enhanced shareholder value, and to address any outstanding shareholder issues in a direct and open manner.
On May 15, 2013, in a Bloomberg.com article, one of the prominent activist hedge funds run by manager Dan Loeb was reportedly to have taken a $1.1 billion stake in Sony Corp (6758). The fund is seeking for changes to be made on Sony’s existing product lines, namely the entertainment division of Sony, and calls for the divestiture of the unit and focus on the development of its core electronics business. These moves by a prominent US hedge fund manager have caused some ripples among the Japanese managers in forcing changes, and to continue focusing on creating shareholder wealth, rather than remaining status quo in the face of rapid technological changes as seen by Sony’s business environment.
According to Bloomberg, US managers have attempted shareholder activism in Japan with limited success since at least in the early 1990s, when veteran energy magnate, T. Boone Pickens was not successful in trying to seek control at auto-parts manufacturer, Koito Manufacturing Co. In late 2005, Christopher Hohn’s Children Investment Fund Management LLP tried to get Tokyo-based Electric Power Development Co., known as J-Power, to increase dividends, and forced changes among the senior executives at that company, but came out unsuccessful three years later, when Mr. Hohn gave up and sold his shares at a loss of approximately USD 130.0 million. An academic study conducted by researchers from Kobe University and University of Southern California (USC) have published a study that showed that of the almost 800 attempted bids led by activist shareholders in the country from 1998 to 2009, only approximately a third of those corporations that survived by shareholder activism manage to adhere to the demands and implement changes.
It is believed that with a new government led by Prime Minister Abe, and his efforts to revitalise the Japanese economy, local corporations will follow the lead and implement changes to the work style, and the entire corporate image they hoped to carry through. The years of deflation and economic doldrums have resulted in the lack of competitiveness shown on the part of the local corporations, and losing sight of their long held emphasis on ensuring top notch product/service quality excellence. Perhaps, with the recent boardroom shakeups and past corporate scandals that have exposed the vulnerabilities of senior management, Japanese investors may soon be following the recent corporate trends by taking on more activist roles, not allowing group think, and thoroughly examine the performance of the senior managers in implementing changes that are hoped to propel the next stage of overall economic growth in Japan. The mind-set of senior management and board members should be changed in order to demonstrate themselves as good examples, before getting the employees and vendors to work together in implementing changes that ensure continuity and creating enhanced shareholder values over a sustainable period of time. It is hoped with the growing revitalisation of the Japanese economy, this new corporate approach towards its stakeholders is expected to improve, given the competitive environment and the increasing lack of sustainability in trying to weaken the Japanese Yen currency going forward in order to stay ahead of competition.