Unhappy shareholders start gunning for underperforming managers

by Tomoko Yamazaki

Bloomberg

A year ago, executives at publicly traded companies defeated all 85 proposals put forward at general shareholders’ meetings by investors seeking higher returns. Shareholders are going after the managers themselves this year.

As Japan’s more than 1,500 publicly traded companies hold annual meetings this week, U.S. proxy adviser Glass Lewis & Co. said the number of investor motions calling for change rose by 16 percent to 99.

Warren Lichtenstein’s Steel Partners led a shareholder revolt last month that ousted the chief executive officer and six directors of wigmaker Aderans Holdings Co.

Southeastern Asset Management Inc. and Effissimo Capital Management Pte. have called on Japanese companies to close unprofitable businesses and increase dividends. The California Public Employees’ Retirement System is supporting demands aimed at increasing shareholder returns that are less than half of those in the U.S.

“I doubt Aderans management will be the last set of underperformers to be given a black garbage bag and shown the door,” said Nicholas Smith, director of equity sales at HSBC Holdings PLC in Tokyo. “The ejection at Aderans has occurred at a very opportune time to focus the minds of management teams.”

Publicly traded companies here will post an average return on equity of 8.5 percent this business year, compared with 18.7 percent in the U.S., according to estimates by Goldman Sachs Group Inc.’s chief Japan strategist, Kathy Matsui. Return on equity is a measure of how well companies reinvest shareholders’ money.

As the benchmark Topix recorded its biggest fiscal-year decline on record, foreign ownership of Japanese equity fell for the first time in five years during the 12 months that ended March 31, according to the Tokyo Stock Exchange.

Foreign shareholders aren’t the only ones demanding higher returns. The Pension Fund Association, which manages about ¥12 trillion in retirement assets, has said it will vote against the reinstatement of directors at companies that have produced a return on equity of less than 8 percent for three straight years.

“Management is under threat from the inside, in a way they have never been before,” said Ed Rogers, chief executive officer of Tokyo-based Rogers Investment Advisors Y.K., which advises clients on what hedge funds to invest in.

The failure of activist investors to win shareholder votes last year prompted a switch to the “poison pen” approach, or sending letters to management to get demands met, before resorting to a shareholder proposal or proxy battle, according to Tokyo-based law firm Nishimura & Asahi.

That tactic has already yielded results. New York-based Steel Partners succeeded in replacing CEO Takayoshi Okamoto at Aderans on May 29 after arguing in public letters that five years of poor performance had eroded confidence in management. Aderans then posted its biggest two-day gain in eight years, surging 19 percent.

Southeastern Asset of the U.S. said this month it will oppose the re-election of Makoto Hyodo as CEO of Nipponkoa Insurance Co., citing his failure to boost returns. Southeastern is the biggest shareholder, with about a 20 percent stake in the Tokyo-based insurer, which holds its annual meeting Thursday.

Gakken Co., a publisher of educational books and magazines, agreed to exit unprofitable operations and appoint outside directors after Singapore-based investment adviser Effissimo Capital pushed for the dismissal of President Yoichiro Endo. Effissimo subsequently retracted the proposal.

“Strict oversight by shareholders will keep companies’ governance straight,” TSE President Atsushi Saito said on June 20. “Companies should appreciate shareholders more.”

Demands from shareholders helped almost quadruple dividends in Japan during the past four years, according to Peter Tasker, an analyst at Dresdner Kleinwort in Tokyo.

The average dividend yield of the Topix climbed to 1.78 percent March 31 from 0.85 percent on Jan. 31, 2006, according to data compiled by . The index fell 29 percent in the same period.

“This year’s round of shareholder meetings promises to be a fascinating spectacle,” Tasker said in a report dated June 11. “The activists are back in the game and both domestic and international institutions are increasingly vocal about shareholder value.”

The Children’s Investment Fund Management (UK) LLP of the U.K. is staging a proxy battle against the management of J-Power, Japan’s biggest electricity wholesaler.

The fund, the largest investor with a 9.9 percent stake, wants the utility to double its dividend, limit so-called cross-shareholdings to a maximum of ¥5 billion, hire at least three outside directors, and spend as much as ¥70 billion to buy back shares.