Covid-19 has done little to dampen activist demands, finds Tim Human
Japanese firms might have expected a breather from shareholder activism in 2020. Given the devastating impact of Covid-19, businesses arguably have less room to meet activist demands on returning cash to shareholders or instigating governance reforms.
Activity has not let up, however. The first half of 2020 saw a new high of 23 shareholder proposals submitted by activists, according to IR Japan, an investor relations consultancy. ‘I don’t get the sense things are slowing at all,’ says Benjamin Adams, managing director at the company.
‘We found that Covid-19 has not significantly reduced the number of activist cases in Japan this year,’ says Lucas Scheer, president at LS Global Advisors, which worked with more than 100 issuers during June’s AGM season. ‘Corporate Japan’s fear of shareholder activism has never been greater.’
Activist Abe The growth of shareholder activism in Japan can be traced back to former prime minister Shinzo Abe’s election in 2012. Once in power, he introduced a series of measures designed to kick-start the country’s stagnant economy. These measures focused on three ‘arrows’: monetary policy, fiscal stimulus and structural reforms.
The third arrow included a shake-up of corporate Japan. In 2014 Abe introduced a stewardship code, followed by a corporate governance code the following year (both have since been revised). The changes encouraged companies to improve balance sheets, shake up boards and sell cross-holdings, among other actions. Japan’s huge Government Pension Investment Fund added to the pressure, backing the new guidelines while also significantly upping its equity allocation. Sensing an opportunity, shareholder activists turned their focus on Japan: the number of companies targeted publicly each year grew from 15 in 2014 to 65 in 2019, according to Activist Insight, a data and analysis firm.
The perception of activism in Japan, especially among the business media, changed dramatically during Abe’s premiership, explains Jochen Legewie, Asia chairman for Kekst CNC, who has headed the firm’s Tokyo office since 2004. ‘Core business media outlets such as Nikkei have very much embraced activism,’ he says. ‘But they make a strong distinction between constructive activists and pushy, purely short-term-oriented funds.’
In this new environment, companies can no longer treat all activists as a negative influence. Such behavior could give the impression they are resistant to change, which would not go down well with financial media or institutional investors, says Legewie. Underlining the shift in attitudes, last year Olympus offered a board seat to ValueAct partner Rob Hale – a highly unusual move for a Japanese business, and a first for a major listed firm.
While it ended in defeat, an ESG resolution filed at Mizuho Financial Group’s AGM this year looks like a sign of things to come for Japanese issuers.
The resolution, proposed by environmental action group Kiko Network, called on the banking giant to disclose its climate risks and align its investments with the Paris Agreement on greenhouse gas emissions. While such action is common in Europe and North America, this was the first shareholder-led climate resolution in Japan.
Despite being voted down, the proposal still garnered a notable 35 percent of support from investors, along with the backing of proxy advisers ISS and Glass Lewis.
Previously, environmental proposals in Japan tended to focus on the abolition of nuclear power, notes Shigeo Imakiire, president of Investor Communications Japan, but now the focus is shifting. ‘We have already observed that other NGOs asked several questions regarding environmental issues at some AGMs,’ he says. ‘Similar shareholder proposals surrounding ESG are likely to increase.’
Evolving approach Ten years ago, 90 percent of foreign activism in Japan ended in failure, notes Scheer. ‘Early agitators were branded as foreign vultures,’ he says. ‘Now around 30 percent-40 percent of shareholder proposals are successful, which is a tremendous improvement.’
The focus of activists has also evolved, adds Scheer. ‘In the beginning, they went after the low-hanging fruit: easier objectives such as an increase in dividends or using cash for short-term valuation gains,’ he explains. ‘But now they’re looking for more permanent changes, like improvements in corporate governance and board representation.
'The types of changes being pushed for are now much more sophisticated.’
Shigeo Imakiire, president of Investor Communications Japan, a joint venture between Broadridge and Tokyo Stock Exchange, concurs. ‘Their demands seem to have shifted from short-term monetary return, such as dividend or buyback plans, to more corporate governance-oriented demands, such as diversity or board skills set to attract more support from other institutional investors,’ he says.
Another area receiving activist attention is corporate efforts to buy out affiliates or subsidiaries at ‘unfair’ valuations, says Scheer: ‘This parent-child consolidation has received strong opposition in some recent cases.’
In particular, he notes Oasis Management’s 2018 effort to block the proposed merger of Alpine Electronics and Alps Electric. Oasis vigorously questioned the valuation of the share-swap agreement, but in the end failed to prevent it going through.
An update to Japan’s foreign investment law has raised concerns that activists could be blocked from building positions in certain sectors – although the government insists this is not the case. In a change to the Foreign Exchange and Foreign Trade Act (Fefta), foreign investors must now report plans to buy a stake of at least 1 percent in businesses important to national security. The previous threshold was 10 percent.
The government has tried to allay fears that the rules would be used to prevent investment by activist funds. Asset managers registered in Japan will be eligible for a ‘blanket exemption’ to the requirements, while the main target of the rules – state-owned enterprises – will not. ‘The Japanese government has made it clear that the changes to Fefta are not targeting activist investors,’ says Benjamin Adams, managing director at IR Japan.
Source: Activist Insight
Covid-19 impact The data for 2020 shows a slight drop in the number of companies publicly targeted by activists. In the first six months of the year, 42 firms received public demands, according to Activist Insight, compared with 56 over the same period in 2019. But few believe overall activism levels are declining.
Covid-19 may have halted public campaigns briefly, but it also allowed activist funds to build up positions at low valuations, says Legewie. ‘Some of the buying is known, like ValueAct’s investment into Nintendo, but some is not,’ he points out.
He predicts a wave of strategic M&A in the second half of the year and beyond – the kind of activity that draws activist attention. When Covid-19 struck, Japan was in the middle of a long-term M&A boom. That trend should return, says Legewie, alongside deals in industries hit hard by the pandemic. ‘This will present opportunities for activists to act and speak up,’ he suggests.
While activity levels have remained high this year, some activists have adapted their tactics amid the Covid-19 pandemic. Historically, many Japanese companies have been targeted for holding too much cash on their balance sheets. In the sharp downturn caused by the virus, however, cash on hand is now a huge strength.
‘Some activists didn’t want to be seen as being too overbearing or aggressive by the public and other investors,’ explains Scheer. ‘Some that had planned to call for buybacks changed their approach.’
One example is the campaign by Oasis at Fujitec, an elevator manufacturer. In a statement published at the end of May, Oasis said it had planned a ‘major public campaign’ focused on removing the company’s president, improving capital allocation and scrapping a poison pill. But given the challenges presented by Covid-19, it said the ‘necessary changes at Fujitec will take even more time’ and so it would call only for the cancellation of treasury shares.
Proxy advisers have also eased the pressure on companies. ISS said it would temporarily drop its target for companies to achieve an average 5 percent return on equity over the previous five years, while Glass Lewis said it would take a pragmatic approach amid the pandemic, including allowing poison-pill defense plans under certain circumstances.
Despite the uncertainty caused by Covid-19, there were still a number of resolutions calling for cash to be returned to shareholders. ‘RMB Capital Management, for one, continued to call for share buybacks from multiple companies it was engaged with this season,’ says Scheer.
Communication breakdown Japanese companies are often at a communications disadvantage to activists, says Legewie. Traditionally, their financial reporting often consists of simply adding figures to disclosure templates and including little in terms of valuable metrics and strategic objectives, he notes.
Meanwhile, activist investors are ‘well versed in the language of international media and investor relations’, and hand journalists everything they need to put a story together, Legewie adds. He notes that some of the larger, internationally focused companies in Japan have very sophisticated IR and PR operations, but the majority do not.
For companies that want to up their IR program, a typical move is to bring in someone with international experience, says Legewie. As an example he points to SoftBank Group, which hired Yoko Dochi as managing director and global head of IR in November 2018. Prior to that role, she spent more than 15 years based in London managing EMEA investor relations for Toyota Motor Corp.
Smaller companies remain particularly resistant to activist demands, says Toshio Konishi, head of research at Sessa Partners. ‘In many cases, they are owned by the founding families, and it is difficult for minority shareholders to encourage changes unless the family spots the triggers by itself,’ he says. ‘Nonetheless, there are some positive moves as fourth or fifth generations – who have work experience in the financial industry or have adopted western thinking – are inheriting the businesses.’
More to come Adams sees no sign of activism letting up in the short or medium term. ‘Activists located in Singapore and Hong Kong have been very active in July at several firms, and US and UK-based activists such as RMB and Asset Value Investors have already made it public that they will continue their campaigns at multiple firms going into next year,’ he says.
‘UK-based Nippon Active Value Fund has just completed its fund-raising so I think we will be seeing Rising Sun Asset Management’s name popping up in the market more often very soon.’
For Adams, one reason shareholder activism should remain high in Japan is that he expects continued flows to activists from pension funds and other sources. ‘Anecdotal evidence is showing that the activist strategy in Japan has been quite successful in generating alpha,’ he says. ‘One fund is rumored to have achieved an 82 percent return in 2019.’
Furthermore, Japan is still perceived to have a significant number of potential targets. ‘Japan has more companies with low price-to-book ratios than any other major market,’ says Adams. ‘It remains a difficult market to win in. [But] given the changes in the corporate governance regime and the strong shareholder rights in Japan, I believe it remains very attractive to activists.’
