Growing Investor Activism

Back to Contents of Issue: May 2003

The laissez faire era of corporate governance may be drawing to a close.

by Darrel Whitten

An important debate about corporate governance is raging in Japan. Amid a historic destruction of shareholder value, there is continued resistance by large Japanese companies to more stringent corporate governance. But that resistance is being met by more investor activism. Recent steps taken by investors in Japan show that at least some of them will no longer go along quietly with the status quo:

Money-management firms are now being required by public pension-fund sponsors to vote their shares according to a predetermined set of voting guidelines, and to report back on how they voted. For example, the Public Pension Fund Association, which handles pensions for workers who have pulled out of their employers' pension funds as well as assets from dissolved pension funds, is pressing its asset-management firms to exercise their voting rights. It voted against 15 out of 150 management proposals at shareholders' meetings last year and aims over the next couple of years to build a structure enabling it to screen out troubled firms with two yardsticks: earnings and corporate-governance standards. It may also use the shareholder activism tactics of CalPERS (the California Public Employees' Retirement System) as a model for its own activities.

CalPERS itself has teamed up with Sparx Asset Management in Japan and Relational Investors LLC in California to set up a pilot Japan Corporate Governance Fund. Worth $200 million, the fund is established to make significant investments in a small number of Japanese companies and "collaborate with management to increase the value of the companies for the benefit of shareowners, employees and other stakeholders." The Pension Fund Association has expressed an interest in teaming up with CalPERS. Such an alliance could have a dramatic impact on how Japanese companies view corporate governance.

M&A Consulting, headed by former bureaucrat Yoshiaki Murakami, has been making hostile bids for Japanese companies since 1999. Murakami sees shareholder value becoming the new Japanese standard, given new accounting regulations and enhanced visibility, the unwinding of cross-shareholdings, growing foreign ownership and an aging society combined with massive under- funding in the pension system. He pushes companies to focus on cash flow and profit, core businesses, capital efficiency, board monitoring, executive compensation aligned with the interests of shareholders, higher dividend payouts and share buybacks.

Individual shareholders with high net worth are also becoming more activist-oriented. Chozo Nakagawa, who invested in 3,000 shares of financial services company Nippon Shimpan, has initiated a JPY46 billion class-action suit against its directors. Nakagawa quit his job last July to prepare for the lawsuit. He studied commercial law on his own and plans to act without hiring a lawyer. Kanehide Yoneyama is a major shareholder in Sekiwa Real Estate, Yuraku Real Estate and the retailer Konaka. Yoneyama started investing in stocks seriously in 1998, using funds he earned while running his own business. As a major shareholder of auto-parts maker Kiriu, Yoneyama pressured management to raise production efficiency and ultimately encouraged the eventual sale of Kiriu to Unison Capital. Yoneyama is now making waves at Konaka, where he is the fifth largest shareholder, with 1.02 million shares.

More organizations are closely watching corporate governance activities at individual companies, rating companies for their corporate governance standards and corporate responsibility regarding environmental and other social issues. Goldman Sachs has prepared a corporate governance ranking system of Japanese corporations based on criteria such as the identity of shareholders, return on equity and employee stock-option plans. The brokerage found a direct correlation between high rankings and high stock prices. Morningstar, in conjunction with the nonprofit Public Resource Center, is developing a stock index of 100 Japanese companies noted for both profitability and social responsibility. Akiyama of IntegreX specializes in assessing the level of social responsibility in the nation's 3,530 listed companies through questionnaire-based surveys. The surveys are meant to assess a company's awareness of its civic duties and to find out what systems the company uses to assure responsible operations. Several trust banks that manage pension funds are negotiating with IntegreX to use the survey results in building their investment portfolios. The Japan Corporate Governance Index Research Group has created the JCG Index ( from a survey of 1,504 listed Japanese companies, of which only 159 responded. The index measures how closely each firm adheres to the Revised Corporate Governance Principles of the Japan Corporate Governance Forum ( Of a possible 100, the average of the companies that responded was 36.3, with most firms scoring lowest on the functioning of their board of directors.

Finally, employees themselves are learning that they need to monitor their company's performance. Matsushita Electric maintains an internal electronic message board as part of an initiative to improve disclosure to employees. Employees can view quarterly earnings figures on the board alongside competitors' numbers. Major entertainment producer, Horipro, has said that its employees are becoming more active. The company reports that it is not uncommon for employees to press management with hard questions like: "Why is our stock price below Yoshimoto Kogyo's?" Nissan's Carlos Ghosn has made a particular effort to keep employees informed and involved in the company's fortunes, installing TVs where the production line stops in the factories --so employees can watch key presentations by top management figures. @

This is excerpted from the weekly MoneyWatch newsletter, available for free at the J@pan Inc Web site.

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