Shareholders Come Out Swinging in Japan

Foreign CEOs like Sony's Howard Stringer and Nissan's Carlos Ghosn are feeling the heat from grillings at annual shareholder meetings

Who can blame Sony's (SNE) Howard Stringer for sounding a bit self-congratulatory? Since taking the helm nearly two years ago, the Japanese company's first gaijin chief executive has ticked off nearly every one of the ambitious targets on his reform checklist for the $71 billion electronics and entertainment giant. With Sony's profit outlook improving, Stringer's optimism only seems to echo what financial analysts have been saying about the company for months.

But investors still found plenty of other reasons to criticize Stringer & Co. during Sony's annual shareholder meeting June 21 at a Tokyo hotel. One vocal shareholder, Koji Morioka, a Kansai University economics professor and founder of nonprofit shareholder activist group Kabunushi Ombudsman, submitted the only proposal that didn't come from the board of directors.

For the fifth consecutive year, Morioka demanded full disclosure of top executives' pay and recommended a revision to the company's articles of incorporation. Unlike many publicly listed U.S. companies, Japanese firms rarely reveal how much individual executives and directors make. Sony is no exception. It has repeatedly expressed opposition to shareholders' requests for more information. "I'm dissatisfied with the company's avoidance of this issue," Morioka told the gathering. He condemned Sony's "lack of transparency" and attacked its decision to "ignore such a large number of shareholders."

Record-Breaking Forecast

"We think we offer sufficient disclosure," President Ryoji Chubachi replied. Morioka's measure failed to get the two-thirds approval it needed to force the company's hand, but a growing number of shareholders made it clear that they favor more openness. More than 44% of shareholders supported the proposal, up from 42% last year.

Given Stringer's record, you would think shareholders shouldn't have much to gripe about. The Welsh-born U.S. executive has overseen a revival in the core electronics division, which accounts for 70% of overall sales, and has improved companywide profit margins. This fiscal year through March, 2008, Sony has forecast a fivefold rise in operating profits to nearly $3.6 billion on a 6% gain in sales to $71 billion. Its prediction for $2.6 billion in net profit would be the company's best ever.

The upbeat figures are one reason Sony's shares have rocketed 26.8% higher this year. "The company remains our top pick in the consumer electronics sector," Deutsche Bank (DB) analyst Yasuo Nakane wrote in a June 18 report.

Yet among the questions from Sony's shareholders were many that reflected skepticism about the turnaround. One investor, who identified himself by his surname, Sakata, called the performance of the Walkman portable music players "shameful" and demanded to know why the Apple (AAPL) iPod was dominating a global market that once belonged to Sony. Others were just as harsh: Why is the gaming division losing $1.9 billion if sales are up, and why wasn't there a fall guy? Why should the yen's weakness hurt Sony if it's hedging against such a possibility? If Sony was recovering, why were dividends still so low?

Calls for Ghosn's Resignation

These days Sony executives aren't alone in getting an earful from vocal shareholders. Not even Nissan Motors (NSANY) President Carlos Ghosn—once revered in Japan for hauling the carmaker from the brink of bankruptcy—has been spared. At Nissan's June 20 shareholder meeting, Ghosn faced calls for his resignation from investors disillusioned by the car maker's declining sales and share price.

Speaking to Japanese public broadcaster NHK, one investor suggested Ghosn should become chairman and leave the day-to-day running of Nissan to Japanese management. Ghosn, a veteran of shareholder meetings, was unruffled. As long as he has the desire to stay, and shareholders overall want him in the job, he's going nowhere, he said.

Sure, some of the criticism of CEOs during the shareholder meeting season is from ranting eccentrics. But recent developments suggest investor activism is on the rise in Japan, particularly from foreigners who are pressuring Japanese managers for reforms and in some cases have been winning concessions. Western funds have been behind a number of high-profile campaigns. In recent months, Steel Partners, the New York fund founded by Warren Lichtenstein, has dogged more than a half-dozen companies with huge cash stockpiles for higher dividend payouts—sometimes demanding double or triple the amount—with mixed results.

Rise of the Mobilized Shareholder

In another case earlier this year, Singapore-based Ichigo Asset Management, run by Scott Callon, successfully mobilized shareholders to block a merger deal in Japan's steel sector between Tokyo Kohtetsu and Osaka Steel after the investment firm judged the merger a raw deal for minority shareholders.

Some local shareholders are getting a piece of the action as well. Japan's Pension Fund Association, which manages $105 billion in assets and a quarter of that in stocks, has pressed Japanese companies to improve corporate governance and boost their annual return on equity to above 8%. That has led hundreds of executives to start making an annual pilgrimage to the fund's offices. "The number doubled last year and it will this year as well," said fund spokesman Taku Yamamoto. "Their visit is not just a formality. Along with the rising importance of investor relations, an increasing number of managers come to explain [their companies' financial situation]."

"While by no means a new market theme, we believe that recent actions by activist shareholders are likely to reignite interest in companies with inefficient balance sheets and low valuations that may be targeted by activists or industrial competitors," Goldman Sachs' (GS) Kathy Matsui wrote in a recent report titled "Shareholder Activists Reactivated."

Show Us Your Pay Stub

The trend appears to have emboldened small investors to take a firmer stand. During Sony's shareholder meeting, a woman, who said her name was Hirata, asked executives to define the "Sony spirit." Stringer replied, "I understand if you look at me as a foreigner and wonder if I understand the Sony spirit." Later, he added: "We have become a more global company than ever and perhaps you are looking at this from a local, Japanese perspective."

To some, those remarks were out of sync with the board's actions on pay disclosure. "Stringer and the rest of the management claim they are remaking Sony into a global company, but when it comes to pay disclosure they're still acting like a typical Japanese company," said a 60-year-old investor and retired Sony engineer, who declined to give his name. "Companies in the U.S. publicly release information on executive salaries. I'm 100% in favor of Sony doing the same."