Japanese season in review

his year has seen a notable cooling of attitudes towards shareholder activism at Japanese companies. In previous years activism has been spearheaded by US investors who appear more willing to engage with the companies in which they are invested than their Japanese counterparts but also more willing to trade their shares for perceived underperformance. Although a quarter of Japanese shares are owned by non-Japanese investors they account for over 60% of the trades volumes. CalPERS and other influential US investors warned in June 2008 of the need for Japan to improve its system of corporate governance or risk further damage to investor confidence in investing in the country, and the economic costs associated with this.

This call by CalPERS follows a backlash by Japanese companies against the kind of activism that lead to Japans first ever successful shareholder revolt in 2007. Tokyo Kohtetsu shareholders rejected a bid from Osaka Steel. The revolt was organised by Ichigo Asset Management, an investment fund run by former Morgan Stanley banker Scott Callon. Callon staged the rare proxy fight against what he saw as an unfair share swap ratio for Tokyo Kohtetsu.

PIRC has recommended votes on 73 resolutions lodged by investors at nine companies since the Kohetsu vote however none of these has been successful. Both the TCI fund (a UK fund) and Steel Partners (a US fund) have been prevented from pursuing their strategies by the use of takeover defences by Japanese companies in which they had stakes. In the case of TCI the target company was J Power a former state owned energy company and the energy sector has attracted the majority of shareholder resolutions this year.

Chugoku Electric Power Co - 6 East Japan Railway Co - 10 Electric Power Development Co (J-Power) - 5 Kansai Electric Power Co - 15 Kyushu Electric Power Co - 5 Tobu Railway Co Ltd - 1 Tohoku Electric Power Co Inc - 6 Tokyo Electric Power Co - 4 Toshiba – 21 of which 15 were contesting directors.

Whilst investors (both overseas and domestic) continue to lobby companies on SRI issues the regulatory climate for funds which challenge management of Japanese companies continues to be hostile. The Japanese government intervened to support J Power last year and courts defended existing managers at Nippon Broadcasting in 2005 and again at BullDog in 2007.

Poison pill resolutions have also been a regular fixture this year. PIRC voted against poison pill resolutions at 38 out of the top 400 companies in Japan during the season.

PIRC considers that the single largest obstacle to shareholder engagement in the Japanese market is the adherence to a narrowly defined date range for holding an AGM. No end to these arrangements is in sight yet the practice of holding an AGM on the same days as hundreds of other companies frustrates meaningful use of voting rights in a way that is not tolerated in the other major capital markets.

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