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A Maverick Founder Wins Enemies in Japan With Move to Dump Board

  • Shares of recipe-site Cookpad plunge even as profit surges
  • ISS Japan head says he’s never seen a case like this before

A spat is rocking one of Japan’s most popular Internet companies after the founder moved to kick out the board, enraging staff and sending shares tumbling.

Akimitsu Sano, who owns 44 percent of Cookpad Inc., shocked investors in January by calling on them to dump all other directors of the recipe-sharing site, saying the company was neglecting its main business. The stock fell 23 percent in one day and has whipsawed with each new skirmish in a battle to control a firm with more than 85 million monthly website users.

Facing exile, as Sano’s stake in effect meant he could unilaterally replace them, the then board sought to negotiate a compromise, and by February reached an agreement for some members to retain roles. Nine directors -- Sano, five of his picks and three others from the previous board -- were anointed by shareholders at the annual meeting in March.

While that averted a proxy fight, the seismic shocks from the incident continue to reverberate. Institutional Shareholder Services Inc., the influential proxy adviser, urged clients to vote against Sano’s re-election as a director. More than 80 percent of Japanese staff signed a petition expressing discontent with the situation. Analysts, meanwhile, say the previous board was doing a good job, and they’re worried about the future.

“It’s a real shame,” said Takahiro Kazahaya, who covers Cookpad for Deutsche Bank AG in Tokyo and downgraded the shares to hold from buy this year. “The company has lost a lot of value. It’s not something the market can respect. There are too many problems. Why did the founder have to make such a proposal?”

On May 10, Cookpad reported a 73 percent year-on-year surge in operating profit for the three months ended March. The figure was the second-highest on record. Kazahaya says the strong performance was due to the previous board’s strategy.

The same day, Cookpad said it would start discussing sales of some units, including kitchenware site Selecture Inc., as well as spinoffs of divisions. This “underscores the uncertainties that linger regarding the firm’s management,” SMBC Nikko Securities Inc. analyst Kuni Kanamori wrote in a report. Shares tumbled 9.8 percent the next day and were down 42 percent this year through Monday. They added 2.7 percent on Tuesday.

While disagreements over the direction of a company are common, the feud over the future of Cookpad is unusual in that the founder went against the rest of the board to get his way. His actions call into question how meaningful corporate-governance structures can be when one shareholder with so much power opts to use it. Cookpad declined to comment for this story or make Sano or other directors or officials available to comment.

Popular Recipes

Since its launch in 1998, Cookpad has become Japan’s largest recipe-sharing website, serving about 60 million monthly users domestically alone, generally women in their 20s or 30s. Recent dishes on the company’s U.S. website include lemon and coconut-crumb muffins, and black-bean burgers. Shares have risen more than five-fold since Cookpad went public in 2009, giving it a $1.5 billion market value.

Sano, the founder, stepped down as president in 2012, passing the reins to former Kakaku.com Inc. head Yoshiteru Akita, who used acquisitions to expand into areas such as user reviews of wedding services, branching out from the company’s origins.

Somewhere along the line Sano became disillusioned, and called on fellow board members last year to refocus Cookpad on the recipe business -- both in Japan and overseas. He moved to the U.S. in 2012 and is still building operations there, according to local media reports. Cookpad declined to comment.

Existing Strategy

The company established a special committee, with advisers including Citigroup Inc., to assess Sano’s suggestion, and in December the committee recommended sticking with the existing strategy, Cookpad said in a statement at the time. Several weeks later, Sano pressed the nuclear button, claiming the review process was both unnecessary and unfair. Motions to appoint directors in Japan require a majority of votes cast to pass, and as all shareholders don’t exercise their proxy, Sano’s proposals would have prevailed, according to ISS.

“The board didn’t like Sano’s suggestion, so Sano submitted a proposal to fire all directors except himself and replace them with new ones including himself,” said Takeyuki Ishida, head of Japan research at ISS, which told clients to vote against Sano’s appointment because his shareholder proposal was inappropriate after the board had approved the other approach. “In theory he can do that, but it’s just not done. So it’s a major risk factor.”

New Rules

Sano’s actions come just as Japan Inc. was being seen as more protective of minority stock owners. The country has revamped its rules for companies and investors under Prime Minister Shinzo Abe, placing more emphasis on independent directors and their duties to shareholders.

There have been signs this is working. In April, Sharp Corp. signed a rescue deal with Foxconn Technology Group of Taiwan after people familiar with the matter said Sharp was leaning toward a potentially lower bid from a state-backed fund. Sharp said at the time it was still talking with several companies.

Meanwhile, Seven & i Holdings Co. rejected a plan by the then chairman and chief executive officer that included removing a successful colleague that investor Daniel Loeb said was motivated by a desire to hand power to the CEO’s son, which the CEO denied at the time.

Governance Test

For Kazahaya of Deutsche Bank, Cookpad is another test of Japan’s governance overhaul. On paper, he points out, the company has an excellent structure, including a majority of outside directors. Four of the five people Sano picked to join him are classified as outsiders. Still, Kayahaya says substance is more important than form. While there’s no reason to suggest they won’t be truly independent, Kazahaya says it’s vital that they are. Cookpad declined to make them available to comment.

“To put it bluntly, it doesn’t matter a jot who chose them,” Kazahaya said. “If they agree with things just because Sano agrees with them, that’s out of the question. It would be a breach of their duty of care,” he said. “My personal opinion is a shareholder lawsuit would actually be a good thing, because it would mean minutes of board meetings could be made public.”

Staff Rebellion

Meanwhile, the employees appear up in arms. Cookpad’s workers have set up a labor union, after more than 80 percent of the company’s roughly 240 domestic staff signed the petition stating their unhappiness with how things stand, according to a Nikkei Business report last month. The union is debating strategies to oust both Sano and Rinpei Iwata -- the new chief executive officer -- the report said. Attempts to contact members of Cookpad’s union were unsuccessful.

Others see no big reason to worry. Sarah Whitley, head of Japanese equities at Baillie Gifford & Co., says there’s no evidence of damage to the company’s growth prospects. Baillie Gifford is the third-largest shareholder in Cookpad with a 7.2 percent stake, and has been adding to holdings this year, according to data compiled by Bloomberg.

“We still think there’s a very large opportunity for the company,” Whitley said in a phone interview from Edinburgh. “We’re not minded to go out and sell something we look on as a long-term holding. Obviously, we would like clarity on what the aims are for the future, but I’m sure we’ll get to them.”

As attention turns to the company’s new strategy, a debate is also under way on what the Cookpad coup means for Japanese corporate governance. While other countries allow smaller shareholders to appoint some outside directors using so-called majority-of-the-minority rules, Ishida of ISS doubts whether any new system is needed -- or would even work -- in Japan.

“When a 44 percent shareholder gets serious, they’ll be able to do whatever they like,” he said. “And this is an extremely rare case.”

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