Corporate Japan needs the activist touch
Wednesday, 4 July 2007
Michiyo Nakamoto
ALMOST as soon as it has entered the Japanese lexicon, "shareholder activism" has become practically a dirty phrase in the land of stakeholder capitalism.
The Japanese corporate community has responded to a growing band of shareholder activists with defence measures such as poison pills designed to dilute their stakes and a smear campaign that characterises them as "greenmailers" - shareholders whose primary goal is to ramp up the share price for short-term capital gains.
The hostility towards activists is being fuelled by xenophobia, since the shareholder activists are largely foreign funds, leading many Japanese to associate activism with foreigners. Steel Partners, a US investor that has launched takeover bids for several household name companies, has been described by Spa, a weekly magazine, as a "rampaging vulture fund".
Even Japanese institutional shareholders who are happy to invest in activist funds will do so, I am told, only as long as they are not active in Japan.
But Japan needs activist shareholders more than they need Japan. This is because the one thing activists can do for Japan that others are not doing is to help unlock the intrinsic value of inefficiently managed companies, thereby improving their competitiveness and boosting returns for all shareholders. The rapid greying of Japanese society poses an urgent need to put the nation's wealth to better use in order to maintain, if not improve, current living standards.
Manufacturing, which is still considered by many to be the only honourable economic activity, can no longer be the main engine of growth when one out of four citizens will be 65 years old or older within the next five years or so.
According to a government survey, 60 per cent of elderly households have no other income apart from their pension payments. Yet the returns of Japanese pension funds have been disgraceful. The Government Pension Investment Fund, the world's largest pension fund which manages Y148,000bn ($1,192bn) in assets, had a return of just 3.63 per cent in the nine months to last December. This compares with the 11.8 per cent Calpers, the California public employee pension fund, returned last year.
Clearly, Japanese companies are not returning enough to their shareholders. In spite of record profits, Japanese non-financial companies made an average return on equity of just 9.0 per cent in the year to March, according to the Tokyo Stock Exchange.
The problem, as many activists have pointed out, is balance sheet inefficiency. Hundreds of Japanese companies are sitting on mountains of cash, which are not generating returns or being put to efficient use. Company managements argue that these reserves are needed to invest in the future or set aside for unforeseen funding needs. But in many cases such reserves have not been used for years, and managers cannot identify what they might use those funds for.
What the critics of activists often forget is that the reforms and higher dividends they are seeking would benefit all shareholders not only by providing them with more income but also by raising the value of the companies they invest in and releasing capital to be reallocated where it is needed.
Higher dividends would also be a powerful incentive for Japanese retail investors who have largely shunned the stock market in favour of more attractive assets overseas -- thereby fuelling the yen carry trade -- to come back into the market.
Japanese investors whose life savings are in pension funds and bank deposits with historically low interest rates need a better performing stock market to ensure they can maintain a reasonable living standard after retirement. A more vibrant stock market is also in the interests of the government, which wants to encourage a shift from savings to investments and boost Tokyo's competitiveness as an international financial centre.
In a ground-breaking move, the Pension Fund Association, which has Y13,500bn under management, recently joined the ranks of activists with a revolutionary declaration that it will vote against any management that fails to achieve a minimum 8.0 per cent return on equity for three consecutive years. But if corporate Japan continues to pursue inefficient strategies and fails to deliver on its potential, the activists will be gone as quickly as they came, leaving the Japanese public to deal with the problem of their diminishing wealth.
.....................................
FT Syndication Service
ALMOST as soon as it has entered the Japanese lexicon, "shareholder activism" has become practically a dirty phrase in the land of stakeholder capitalism.
The Japanese corporate community has responded to a growing band of shareholder activists with defence measures such as poison pills designed to dilute their stakes and a smear campaign that characterises them as "greenmailers" - shareholders whose primary goal is to ramp up the share price for short-term capital gains.
The hostility towards activists is being fuelled by xenophobia, since the shareholder activists are largely foreign funds, leading many Japanese to associate activism with foreigners. Steel Partners, a US investor that has launched takeover bids for several household name companies, has been described by Spa, a weekly magazine, as a "rampaging vulture fund".
Even Japanese institutional shareholders who are happy to invest in activist funds will do so, I am told, only as long as they are not active in Japan.
But Japan needs activist shareholders more than they need Japan. This is because the one thing activists can do for Japan that others are not doing is to help unlock the intrinsic value of inefficiently managed companies, thereby improving their competitiveness and boosting returns for all shareholders. The rapid greying of Japanese society poses an urgent need to put the nation's wealth to better use in order to maintain, if not improve, current living standards.
Manufacturing, which is still considered by many to be the only honourable economic activity, can no longer be the main engine of growth when one out of four citizens will be 65 years old or older within the next five years or so.
According to a government survey, 60 per cent of elderly households have no other income apart from their pension payments. Yet the returns of Japanese pension funds have been disgraceful. The Government Pension Investment Fund, the world's largest pension fund which manages Y148,000bn ($1,192bn) in assets, had a return of just 3.63 per cent in the nine months to last December. This compares with the 11.8 per cent Calpers, the California public employee pension fund, returned last year.
Clearly, Japanese companies are not returning enough to their shareholders. In spite of record profits, Japanese non-financial companies made an average return on equity of just 9.0 per cent in the year to March, according to the Tokyo Stock Exchange.
The problem, as many activists have pointed out, is balance sheet inefficiency. Hundreds of Japanese companies are sitting on mountains of cash, which are not generating returns or being put to efficient use. Company managements argue that these reserves are needed to invest in the future or set aside for unforeseen funding needs. But in many cases such reserves have not been used for years, and managers cannot identify what they might use those funds for.
What the critics of activists often forget is that the reforms and higher dividends they are seeking would benefit all shareholders not only by providing them with more income but also by raising the value of the companies they invest in and releasing capital to be reallocated where it is needed.
Higher dividends would also be a powerful incentive for Japanese retail investors who have largely shunned the stock market in favour of more attractive assets overseas -- thereby fuelling the yen carry trade -- to come back into the market.
Japanese investors whose life savings are in pension funds and bank deposits with historically low interest rates need a better performing stock market to ensure they can maintain a reasonable living standard after retirement. A more vibrant stock market is also in the interests of the government, which wants to encourage a shift from savings to investments and boost Tokyo's competitiveness as an international financial centre.
In a ground-breaking move, the Pension Fund Association, which has Y13,500bn under management, recently joined the ranks of activists with a revolutionary declaration that it will vote against any management that fails to achieve a minimum 8.0 per cent return on equity for three consecutive years. But if corporate Japan continues to pursue inefficient strategies and fails to deliver on its potential, the activists will be gone as quickly as they came, leaving the Japanese public to deal with the problem of their diminishing wealth.
.....................................
FT Syndication Service