Shareholder Activism in Japan? Not Yet
Some stockholders want to rename the venerable investment bank “Vegetable Holdings” to urge healthy business practices on a board embroiled in insider-trading accusations. Just as untenable was the suggestion at the annual general meeting that Nomura re-equip its offices with old-style Japanese toilets -- essentially holes in the ground. Yet another shareholder proposal aims at “toughening the legs and loins and hunkering down on a daily basis, aiming at achieving 4-digit stock prices.”
At least that one, as bizarre as it sounds, raises a real issue: at 296 yen ($3.72), Nomura shares are a disaster, down more than 80 percent in the past five years.
Tokyo Electric Power Co., which brought us the worst nuclear crisis since Chernobyl, is on its own hot seat. Shareholders are demanding that the owner of the crippled Fukushima reactors abandon or reduce its dependence on nuclear power and do more for the 100,000-plus people forced to abandon their homes. Tepco isn’t used to such bluntness.
Yet let’s not get ahead of ourselves. For all the signs that shareholders are speaking up after decades of reticence, there are even more suggesting that a revolution in Japanese corporate governance is more myth than fact.
First, the good news. As scandals go, the last 15 months have been rough on Japan. From Tepco to Olympus Corp. (7733)’s merger deceptions to AIJ Investment Advisors Co.’s hidden losses, investors received ample reminders that the stale status quo reigns in a nation that needs to plot a new course to remain competitive.
The government’s clumsy response to last year’s earthquake and tsunami added fuel to electoral activism that in August 2009 ended almost 55 years of unbroken Liberal Democratic Party rule. A steady parade of shocking corporate scandals since then, the slow pace of post-quake reconstruction and unpopular efforts to raise sales taxes now have the ruling Democratic Party of Japan fighting for its life.
Even “Mrs. Watanabe” is losing faith. That’s the metaphorical name for individual Japanese investors, many of whom are housewives who tend to control the family purse strings.
“This has translated into unprecedented public condemnation of former Japan Inc. stalwarts such as Tepco,” says Ed Rogers, the chief executive officer of Tokyo-based Rogers Investment Advisors. “We expect this will all lead to further shareholder activism as Mrs. Watanabe becomes increasingly vocal in dissent on both economic and political issues. As a voter and as a shareholder, Mrs. Watanabe no longer trusts Japan Inc. in the way she once did, and may never again.”
The bad news is that corporate Japan isn’t listening very closely. Japanese companies are cash-rich at a time when Europe is in turmoil and America is in risk-aversion mode. The expectation is that the strong yen will lead to an explosion of mergers-and-acquisitions that pumps up profits.
Not so fast, says Naomi Fink, an equity strategist at Jefferies Japan Ltd. in Tokyo. She points to evidence that corporations are squandering their built-up cash stores by paying too much for overseas acquisitions. Return on investment doesn’t tend to improve after these acquisitions. There are few signs this is changing even as more shareholders speak out.
To those giddy that change is sweeping Japan, Nicholas Smith, a strategist at CLSA Asia-Pacific Markets Ltd. in Tokyo, has two words: Michael Woodford. He was the Olympus president dismissed last October for daring to ask why the company’s books didn’t add up. The scandal led to an earnings restatement and a $1.3 billion cut in its total equity.
When the vindicated Woodford volunteered to return to his job, no domestic institutional investors supported him. “That is the core of the problem,” Smith says. “People get the corporate governance that they deserve -- as well as the pension returns that they deserve.”
Granted, our system of capitalism isn’t exactly distinguishing itself. Every day brings a new tale of malfeasance or incompetence. JPMorgan Chase & Co.’s trading loss may reach $9 billion. China’s economic data can’t be trusted. Facebook Inc.’s initial public offering was a bomb. The Libor market is rigged. I could go on, but why should anyone trust the financial markets and those who participate in them?
Yet if Tokyo wants to remain a world financial center, it must make companies more accountable. It must clamp down on insider trading, and that includes stopping companies from leaking earnings figures to the media. It must shorten the period for public stock offerings -- currently 15 days -- to discourage dodgy dealings. It must, in general, take white- collar crime seriously and hand out more prison terms.
That will only happen when shareholders find their voice, ask pointed questions and demand change. It’s great that we are seeing more of this, but we need much, much more of it. Only that will get Japanese managers to pay attention to the interests of investors.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
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