Inside the Board Feud That Riled Loeb, Tested Top Japan Planner

  • Kunio Ito was the architect of Japan’s governance overhaul
  • As a Seven & i outside director, he had to show it worked

When Kunio Ito designed the government’s blueprint for how Japanese companies should be run, little did he realize he’d be at the center of one of its biggest tests.

QuickTake Remaking Japan Inc.

Kunio Ito

Photographer: Akio Kon/ Bloomberg

The professor, who highlighted the role of external directors in a 2014 state-backed review, was an outside board member at Seven & i Holdings Co. when a boardroom feud erupted earlier this year. Not only that, Ito headed the retailer’s new nomination committee. So when Toshifumi Suzuki submitted a proposal to remove a leading candidate to succeed him as head of the group, Ito was thrown into the spotlight.

Billionaire hedge fund manager Daniel Loeb was lobbying against the plan, saying Suzuki was clearing the way for his own son, as foreign investors watched whether the governance reforms Ito had masterminded would have any influence over the board’s decision. Ignoring a request from Loeb to talk, the 64-year-old professor evaluated Suzuki’s idea and decided he couldn’t endorse it. Several days later, directors voted against the proposal and Suzuki resigned.

Toshifumi Suzuki

Photographer: Kiyoshi Ota/Bloomberg

“I had 50 or 60 e-mails when I got home that night,” Ito said in an interview in Tokyo, referring to the April 7 board meeting. “The one that made me happiest came from a Japanese investor: ‘This day will go down in history as the day Japan was saved,’ the investor wrote.”

Governance Revamp

Seven & i was a rare case where a Japanese boss failed to win the support of his board, at least partly because of its outside directors. It came less than a year after Japan started a code for companies that requires firms to appoint at least two outside board members or explain to shareholders why they didn’t. That, along with rules for investors started in 2014, were born from Ito’s state-backed review of Japan’s capital markets.

Daniel Loeb

Photographer: Simon Dawson/Bloomberg

Some 78 percent of companies in Japan’s Topix index had at least two independent outside directors as of June, according to the Tokyo bourse. That’s up from 48 percent the previous year. Despite the overhaul, Japan Inc. has seen a string of governance scandals at famous companies ranging from Toshiba Corp. to Mitsubishi Motors Corp., and some foreign investors have questioned whether executives were paying lip service to the new rules.

Nomination Committee

As Ito tells it, that wasn’t the case for the outside directors at Seven & i. The company had set up a four-member nomination and compensation committee in March, with Ito at the helm. Fellow external director Toshiro Yonemura, CEO Suzuki and his right-hand man Noritoshi Murata were the other members. Suzuki declined to comment on the boardroom feud at Seven & i.

When Suzuki submitted the proposal to remove Ryuichi Isaka, who headed the group’s Seven-Eleven unit, Ito says he started investigating whether it had merit. As he talked with customers, investors, store owners and others, nobody would say a bad word about Isaka, he said. Seven-Eleven was consistently delivering strong earnings.

“It’s very rare for a company manager to post five straight years of increased profit, so the proposal to remove Isaka was too extreme,” Ito said. “If we went by those standards, two of every three Japanese executives would lose their jobs.”

Ito says Third Point’s Loeb contacted him, but the professor decided not to talk with him because he wanted to stay impartial when making his decision. Third Point declined to comment.

Committee Deadlock

Yonemura, a former Tokyo police chief, and Ito decided there was no reason to remove Isaka, and voted against it in the nomination committee, according to Ito. Suzuki and Murata voted for Suzuki’s proposal, Ito said, creating a deadlock. The committee opted not to endorse the plan.

The proposal then went to the board, where it needed support from eight of the 15 directors to pass. It failed by just one vote: seven members were in favor, six opposed and two abstained.

The independent directors weren’t the only factor in blocking Suzuki’s plan. Masatoshi Ito, Seven & i’s influential honorary chairman and a founder of the group’s Ito-Yokado unit, was against it too, Suzuki and his deputy Murata said at the time.

Isaka was appointed to succeed Suzuki as CEO later in April, as Loeb had called for in a March letter. Seven & i’s shares are down 9.1 percent from April 7 through Wednesday. They slid 0.1 percent on Thursday.

For Ito, the conclusion to Seven & i’s succession controversy shows the influence outside directors can have on boards in Japan.

“It was a non-binding, advisory committee, but it had some effect from a governance perspective,” Ito said. “Even if there are just two outside directors, they can have meaning if what they say is taken into account.”

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