Prime Minister Shinzo Abe has made it a priority to steer Japan toward better corporate governance standards. Unfortunately, the nation's most important company is heading the other way.
Toyota is making loads of cash thanks to Abe's weak-yen policies -- its profits this year seem to be blowing past last year’s record $18 billion. Yet rather than becoming friendlier to shareholders, as Abe has asked in return, the automaker has been trying to weaken its investor base. It's doing so with an unusual new stock that will lock up investors’ money for five years.
These "Model AA" shares are likely to attract individual Japanese investors, rather than hedge funds managers. And that's no accident. For a company that wants to ward off investor activism, it's the whole point.
After watching Sony and robot maker Fanuc fight off assaults from foreign billionaires like Daniel Loeb, Toyota -- which is an obvious target for activists, given the $38 billion in cash and short-term investments on its balance sheet -- would prefer to cultivate a more docile shareholder base. That's where Japan's elderly population comes in. More than one quarter percent of Japan's 127 million people are over the age of 65 -- and to the extent that they are investors, they tend to be on the lookout for low-risk stocks.
Toyota's Model AA shares are perfectly suited for them. In exchange for holding the shares for five years, investors get interest payments as high as 2.5 percent. If you're living in a risk-averse nation like Japan that has near-zero percent bond yields, that's a pretty attractive offer -- less so, if you're a foreign investor looking to maximize your returns.
Toyota's move is making a mockery of a key pillar of Abe's economic revival plan. He hoped that by making corporate Japan more international -- and more exposed to interventions by foreigners like Loeb -- companies would become more likely to increase pay for workers or invest in new job-creating projects.
Just last year, Japan introduced a stewardship code that enlists investors to pressure businesses to boost profit. And next month, Tokyo is imposing new legal guidelines that will encourage companies to be more responsive to financial markets and put a stop to insular practices like cross-shareholdings between friendly companies.
It's not hard to guess why Toyota is rolling out these Model AA shares now, just ahead of Japan's new governance code (and one month after Harry Wilson shamed General Motors into announcing buybacks). “As long as you’re a listed company, you can’t select your shareholders,” Takashi Hiroki, chief strategist at Monex Securities in Tokyo, told Bloomberg News. “But Toyota’s new class of shares is a new approach to choose their investors. Toyota is expressing who they want to be purchased by.”
Toyota's president, Akio Toyoda, seems to have been planning this Model AA stock move for some time. In 2012, the year Abe took office, Toyoda declared, “We want investors to look at us with a warm attitude, compared with the current attitude of, ‘How much profit will Toyota make this year, or next year?’” In March, he even told a gathering of 4,000 investors that return on equity wasn't his priority -- making better cars was.
So long as it's pulling in $18 billion a year and sitting on $36 billion of cash that won't necessarily be a problem for Toyota. But the company's reluctance to take advice from outsiders, or share its wealth with its 68,000 workers, certainly poses a problem for Abe.
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