Shareholder Rights? In Japan?

Foreign activists are putting the screws on business-as-usual

The plight of Japan's Long-Term Credit Bank has almost brought down that country's financial system. LTCB's maneuverings have prompted something else, too: a shareholder lawsuit from Martin J. Whitman, chief of the Third Avenue Value Fund in Manhattan. In September, he sued the bank in a U.S. court to block its plan to forgive $3.7 billion in secured loans owed LTCB by some nonbank affiliates. Fortunately for Whitman, opposition politicians howled about the deal so loudly that LTCB backed off.

Shareholders, often foreign ones, are fighting back against Japan Inc. This will be a long struggle: In Japan, the shareholder has forever taken a backseat to management. But the activists are pressing on. As a result, some governance specialists are voicing optimism--guarded though it may be--about shareholder rights in Japan.

One source of the action is Baltimore-based Institutional Shareholder Services (ISS), a U.S. proxy advisory firm. Director Patrick McGurn swings through Japan twice a year to stir interest in shareholder rights. His associate, Marc Goldstein, points out that among Japan's multinationals (table), foreign investors are now quite numerous: "If they can present a united front with a few Japanese shareholders, then management will not get their resolutions passed."

But in Japan, change is evolutionary, not revolutionary. During the annual meeting season in June, ISS recommended that its 250 institutional clients vote against 415 Japanese companies proposing the appointment of internal auditors ISS deemed not independent enough. The target companies included Nomura Securities, Mitsubishi, and Sumitomo Bank. ISS's proposals lost--but the firm is already working on issues for next year.

There are signs of activism among the Japanese themselves. The Japanese press widely reported Mitsui Trust & Banking Co.'s vote against five companies in which it has stakes: The companies aimed to award hefty retirement packages to senior executives involved in payoff scandals. "I think there will be more and more [domestic] shareholders taking such a stance," says Mitsuhiro Nakano, strategist at Daiwa Institute of Research Ltd. "Otherwise, they are going to relentlessly sell their shares."

SALARYMAN MIND-SET. It might be easier for companies to heed shareholders if they had smaller, smarter boards of directors. Japanese law stipulates that boards monitor the company president and protect shareholders, according to Takayasu Okushima, professor of corporate law and president of Waseda University. In reality, Japanese boards are huge, cumbersome committees made up of insiders who defer to the president and stand up for their divisions of the company. This factionalism makes it tough to close lines of business, notes Gary Evans, strategist for HSBC Securities Japan Ltd. And such directors have a salaryman mentality that puts employees' interests over shareholders'.

Some change is afoot, though. In June, Toshiba Corp. slimmed its board from 33 members to just 12. Sony Corp. has cut its board to 10 members from 38, including three nonexecutive directors. Other companies followed with similar moves, including Aiwa, Nikko Securities, Sega Enterprises, Fuji Photo Film, Hitachi, Tokai Bank, and Nippon Credit Bank. "Japanese boards are going to look very different 10 years from now," says ISS's McGurn.

Of course, learning to protect shareholders calls for a major change in mind-set. In September, Whitman wrote Toyota Motor Corp. protesting the auto maker's way of hiking its stake in Chiyoda Fire & Marine Insurance Co. from 27% to 37%. Whitman says the deal ignores minority shareholders' rights because Toyota bought new Chiyoda shares at a price far below book value. He's more resigned than angry. "I don't think Toyota knows any better," he says. Good point: It's up to nervy investors to teach Japanese companies to care.