Hermes $250 Billion Activism Business Finds New Pasture in Japan

  • Hermes EOS provides stewardship services for pensions, others
  • Pension Fund Association signed up as first Japanese client

As activist short sellers target Japan for the first time, the nation’s biggest companies are also facing increased pressure from a more surprising source: a collective of their most reliable investors.

Hermes Investment Management Ltd. is campaigning for changes at more than 30 Japanese firms for clients including the Pension Fund Association, which became the nation’s first investor to hire the firm earlier this year. The London-based company’s stewardship services unit is also in talks with several other Japan money managers, according to its co-head Hans-Christoph Hirt. Hermes Equity Ownership Services has about $250 billion of investor money behind it, and its focus is troubled stocks.

“We need to look at companies that are held by a significant number of clients, have a significant amount of money and have issues of concern,” Hirt said in an interview on a visit to Tokyo last month. “By engaging with the company we can do something about the problem.”

Hermes EOS handles everything from voting at annual meetings, to writing letters to and meeting boards and chairmen, in order to seek governance improvements. It added its first Japanese client about two years after the nation started a stewardship code to encourage money managers to press executives to boost returns.

Stewardship Code

Some 213 institutional investors, including pension funds, trust banks and insurance companies, had signed up to the voluntary principles as of Sept. 2, according to the Financial Services Agency.

“More and more pension funds and trust banks are asking themselves what should we do about the stewardship code,” said Hirt. “The solution we offer is 43 funds sharing the costs, sharing the team effectively in doing stewardship work not just in London or in Frankfurt or in Tokyo but all around the world.”

While investors usually hire Hermes EOS to help them with their duties outside their home markets, the Pension Fund Association is seeking assistance with stewardship within Japan.

“Our focus is to improve the transparency and efficiency of Japan’s capital markets in order to attract more investors, not only from Japan but also from overseas,” Daisuke Hamaguchi, Tokyo-based chief investment officer of the PFA, said in a statement on the appointment in March. “It is about time the industry starts acting as good stewards.”

Activist Shorts

Hermes EOS is recruiting Japanese clients just as the market comes under increasing scrutiny from short sellers. Both Citron Research and Glaucus Research Group targeted their first Japanese companies this summer, while Yuki Arai, a local bear, has published short reports on three listed stocks.

Hirt says Hermes is engaging with about 35 companies in Japan, with board composition, director independence and cross-shareholdings among the biggest topics. The shareholder advisory group has three Japanese people working directly with firms in a broader team of 26 people.

Hermes EOS started in 2004, working for the BT Pension Scheme on its passive portfolio. More recently, it’s been actively calling for change at Volkswagen AG after the carmaker’s emissions cheating scandal. Hirt says Japan’s governance overhaul will only succeed if investors fulfill their responsibilities under the stewardship code.

“It’s certainly on the right track,” said Hirt. “But now it’s really important what the funds will be doing.”

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