Sony Shareholders Have Too Much Patience

Like hedge-fund manager Daniel Loeb, Japanese shareholders should be fed up with poor management of Sony. 
One smartphone in a crowded market.

Daniel Loeb dumping his stake in Sony no doubt thrilled the company's executives. Now they can return to driving the one-time world leader into the ground without interference from that pesky foreign investor.

Japanese stockholders, for their part, have watched Sony tumble painfully from technology leader to laughingstock to distressed asset, right before their eyes, yet they are standing by Kazuo Hirai, the latest Sony boss to promise change and deliver only losses.

Before Hirai took over in 2012, Howard Stringer, Nobuyuki Idei and Kunitake Ando all tried and failed to stop Apple from stealing Sony's franchise. But it's Hirai who may earn the particular scorn of corporate historians, and not just because, under him, Sony failed to pay an annual dividend for the first time since its 1958 listing. Hirai failed to see how quickly the world outside his office was turning against Sony. His decision to stick with flat-screen televisions, smartphones and other gadgets even as they were dominated by South Korea and, soon, China deserves its own MBA course: Delusion 101.

Back in May 2013, Loeb's Third Point hedge fund figured Sony was still salvageable -- if it would make some bold moves, including dumping as much as 20 percent of its entertainment unit. Loeb taking his chips off the table now is ominous; he's known to be among the more patient of the international shareholder activists.

Local shareholders now need to follow Loeb's example by speaking out. Japanese Prime Minister Shinzo Abe sounds as if he's leading the way with talk of tighter corporate-governance standards. Last September, Abe even took his "Japan-is-back" message to the New York Stock Exchange, complete with a shout out to Gordon Gekko.

Thirteen months later, Tokyo has yet to lift restrictions on corporate takeovers to unleash the Gekko Effect. Lobbyist are watering down Abe's plans to nudge companies to hire outside directors and women. Any push to end the complicated cross-shareholdings system that's thwarted the likes of T. Boone Pickens or Warren Lichtenstein of Steel Partners seems a reach. Ditto for encouraging courts to be less biased against private-equity firms. And why isn't Abe condemning the cabal-like practice of allowing virtually every major company to hold annual general shareholder meetings on the same day? This isn't rocket science -- it's political will.

Rather than let shaky Japanese companies be acquired or restructured, the government persists in extending them loans. Abe's administration is pushing the $1.2 trillion Government Pension Investment Fund to buy more Japanese stocks -- one of history's biggest corporate welfare programs. What Abe calls "reform," I call bailing out underperforming CEOs with public money.

Sony surrogates argue it's all good -- Loeb earned 20 percent on his $1.1 billion investment. But when Sony's shares are up, it's not because the company is making products consumers want or revisiting the glory days when its Walkman, Trinitron television and disk-storage systems changed the world. It's because history's biggest quantitative-easing experiment made money free, weakened the yen and boosted asset prices. Thanks to the Bank of Japan, Loeb made money in spite of Hirai's bad leadership. Moral hazard, anyone?

Culture is a tough thing to change, and it's rarely in the Japanese nature to pound tables and demand action. Recall that when Olympus whistleblower Michael Woodford was vindicated of fraud in 2012 and volunteered to return to the embattled company, shareholders said no. They were too angry that the gaijin had gone public.

Yes, two years is a long time. And there are indeed signs some Japanese punters are growing impatient, as my Bloomberg colleagues Tom Redmond and Takako Taniguchi explain. Rather than messy proxy fights aired in public, this latest wave is based more on dialogue and consensus. But is shareholder activism with Japanese characteristics enough? I'm doubtful.

Abe must level the playing field for investors, whether they live in New York, like Loeb, or Tokyo. But it's equally important for Japanese shareholders to exercise their rights. By asking hard questions of the Hirai's of the world, they could do far more than Abe's talk to enliven economic growth.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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