This Activist Investor Doesn’t Have Time for Japan’s Nice Meetings
Tsuyoshi Maruki stands out like a lone wolf in Japan, where societal intolerance for aggressive shareholder campaigns has spurred a breed of friendly activists.
Not Maruki. Where persuasion doesn’t work, he turns to techniques that include banding with other investors to oust management and filing lawsuits to overhaul corporate practices in order to boost returns for his 9.7 billion yen ($90 million) fund.
“If one always adopts a friendly engagement style, such as having gentle and warm meetings, would the management really change?” said Maruki, 56, who founded Tokyo-based Strategic Capital Inc. in 2012. “After the meeting, it would probably end at a comment like, ‘They were nice.’"
More than a year after Shinzo Abe introduced a corporate governance code aimed at making Japanese companies more attractive to investors, there’s been a surge in the number of so-called “engagement funds” that seek friendly interactions with companies to increase share prices. Yet bringing about meaningful change has been a struggle as Japan Inc. has pushed back. In a government pension fund survey published last month, some companies that are targets of activist actions said investors waste their time with pointless questions and meetings, and that shareholders are too focused on short-term benefits.
It’s not easy to win over investors, either. Despite beating the market for two straight calendar years, Maruki hasn’t seen a lot of interest from domestic institutions, many of which have business ties with listed companies and are loath to damage those links. Recent victories by foreign investors such as Dan Loeb, who helped persuade Seven-Eleven convenience stores’ owner Seven & i Holdings Co. to appoint his pick as president, suggest the time might be right for Maruki and Japanese shareholders to use more aggressive tactics.
"We need to see more expansion of aggressive activism funds because still, Japanese companies are sitting on ample, excess cash,” said Masatoshi Kikuchi, chief equity strategist at Mizuho Securities Co., who published a book this year on shareholder activism. “We need to see strong action from aggressive funds.”
Maruki, a soft-spoken man who holds a law degree from the University of Tokyo, worked for Nomura Securities Co. for 17 years before co-founding a consultancy and its flagship MAC Active Shareholders Fund, which grew to 444 billion yen at its peak.
After his partner, Yoshiaki Murakami, who is considered one of the nation’s earliest champions of shareholder rights, was convicted of insider trading, Maruki left to start a venture capital firm to develop investment opportunities in Japan with Asian multinational companies. He returned to activist investing in 2012. Murakami received a two-year prison sentence, which was suspended on appeal. Last year, the Securities and Exchange Surveillance Commission began investigating whether Murakami tried to manipulate stock prices. He has said he expects to be exonerated.
In April, Strategic Capital went on a crusade to urge companies to increase dividends and reduce cross-shareholding, submitting shareholder proposals to four: synthetic textile trading company Chori Co.; a provider of accounting software for accountancy firms, Japan Digital Laboratory Co.; air-conditioning system maker Shin Nippon Air Technologies Co. and Tosho Printing Co. A Tosho Printing spokesman said the company is considering the proposal. Representatives for Chori and Shin Nippon Air declined to comment.
In February, Maruki’s firm filed a lawsuit against Japan Digital Laboratory President Kazuo Maesawa for “unreasonable, expensive” payments to his two brothers, according to a statement by Strategic Capital. A spokesman for Japan Digital Laboratory declined to comment on the suit or on the shareholder action.
Japan Digital had paid a tax accounting office that Maesawa’s brother manages 8.9 million yen annually for consulting fees from 2003 to at least 2013 and a 7.2 million yen annual salary from 2008 to 2013, according to the lawsuit, which called it a duplicate payment.
Another brother of the president who is an architect received payments ranging from 12 million yen to more than 200 million yen a year for design and supervision of the company’s facilities for at least six years ending in March 2012, even though it’s difficult to find facilities that needed such spending, the suit alleges.
Maruki also took on W-Scope Corp., a battery maker that saw shares plunge to as low as 329 yen a share in April 2013 from an initial public offer price of 2,500 yen a share in December 2011. Maruki said he sought to remove the president at the 2014 annual shareholder meeting by gathering support from other shareholders. The president, under pressure, met with Strategic Capital a day before the meeting and has since improved business by finding new clients and boosting sales, Maruki said. A spokesman for W-Scope declined to comment.
Shares of W-Scope now trade at around 5,800 yen a share, and their rise helped Strategic Capital post about a 43 percent of annualized return during an 18-month period that ended in early 2015, when the fund was engaged with the investment.
Maruki also cites cases of success through quiet agitation. Takara Printing Co. is an example. Strategic Capital started investing in Takara in November 2014 when its price averaged around 1,005 yen a share. Maruki said he privately urged the company to increase its dividend and make other operational improvements. The fund exited at an average selling price of 1,300 yen this year, providing a return of almost 30 percent on an annualized basis, according to the company. A spokesman for Takara declined to comment.
Maruki’s fund’s performance shows his strategy is working. Strategic Capital outperformed the Topix in the past two years, achieving a 16 percent return in 2015 and 15 percent in 2014, compared with the index’s 9.9 percent and 8 percent gains in those periods. It fell 4.2 percent in the first three months of 2016, compared with the Topix’s 13 percent decline.
In Tuesday’s trading, shares of Shin Nippon Air Technologies closed 8.5 percent higher, the biggest increase since March 2011. Japan Digital gained the most since March, rising 2.5 percent, Chori rose 3.6 percent, while Tosho Printing fell 4.6 percent in Tokyo.
Japan-focused activist funds, including friendly and more aggressive types, are on the rise, representing 22 percent of such funds started in 2015 globally. That’s even as the number of the activist funds in the nation account for no more than 1 percent of 513 of such funds globally, according to the research firm Preqin Ltd.
Friendly funds include Taiyo Pacific Partners LP, which was selected by the $1.3 trillion Government Pension Investment Fund in 2014 to help manage its assets because of its non-hostile approach to bringing about change, according to minutes of the pension fund’s investment-committee meeting. Misaki Capital Inc., a Japanese activist firm that uses friendly means to help companies increase profits, has seen assets surge more than sevenfold in the past year.
Japan Inc. still lags the global average in investment attractiveness. Companies on the broader Topix index had an average return on equity of 7.4 percent as of the first quarter of this year, compared with 9.2 percent for the MSCI World Index, data compiled by Bloomberg show.
Maruki said when he confronts company executives, he prefers a calm and logical discussion.
“There’s no point in losing one’s cool," he said.
Nicholas Smith, a strategist at CLSA Ltd. in Tokyo who has met Maruki, said he finds him "incredibly knowledgeable," with a strong pedigree in corporate governance.
"Of course he doesn’t seek out confrontation, but he doesn’t shy away from it either," he said. "This is no different than what’s going on in other countries. There’s nothing unpleasant or unusual about it.”
Even so, domestic investors aren’t so keen on investing. The company started a Cayman Island unit trust in 2014 as it sought to attract more foreign investors amid a lack of interest domestically.
“Most of the Japanese institutional investors except public pensions have some relationship with listed companies such as subsidiaries of listing companies, banks, insurance companies, securities firms and corporate pensions,” said Maruki. “They do not want to invest in funds that will become confrontational to the listed companies.”
Even though going up against companies isn’t popular or easy, Maruki said it’s for the good.
“There’s huge room for improvement in terms of corporate governance in Japanese companies,” said Maruki. “Our strategy works. If all managers changed their minds at once, then we’d have nothing to do.”