Aesop's fable becomes a symbol of Japan's new shareholder activism

by Takako Taniguchi


Seeking to explain changing attitudes in the world’s second-biggest stock market, asset managers in Tokyo have been evoking ancient Greece.

In Aesop’s fable of the North Wind and the Sun, the two elements have a contest to see which is stronger, the challenge being to make a man remove his coat. The north wind unleashes a gale and the man wraps up tighter. Then the sun shines and he takes the jacket off.

The moral, that persuasion trumps force, is informing a wave of shareholder activism in Japan, with the government’s blessing. It’s built on dialogue and consensus rather than proxy fights played out in public, say proponents such as Ken Kobayashi, director of investment at a fund within Japan’s oldest insurer, and Brian Heywood, chief executive officer of Taiyo Pacific Partners LP. The strategy has taken the name “engagement” in the local language, a transliteration of the English term.

The North Wind refers to Western activists like Warren Lichtenstein’s Steel Partners that tried to force change at Japanese companies, Kobayashi said in an interview on Sept. 19. They “would generally just say what they thought was right. But it didn’t really work with Japanese corporate culture. We’re partly a reaction to them. We take this culture into account.”

Kobayashi’s $330 million Japan Engagement Fund picks 10 to 15 medium-size companies that are open to change, and advises them on how to improve their performance and financial strategies, he said. The investments, which aren’t disclosed by JEF, include Calbee Inc., according to Chisa Hayakawa, an executive officer at the snack maker. JEF is a good investor that really listens and is supportive of the company’s growth, Hayakawa said.

JEF, part owned by the investment arm of Tokio Marine Holdings Inc., returned 16 percent in the two years through March, compared with a 3 percent gain for the company’s mainstream funds. It got its first local pension clients this year, Kobayashi said.

The idea for the “engagement fund” ran into opposition at the planning stage as colleagues worried about the reputational risk of activism and whether it would pay, according to Kobayashi. Things are easier now, with companies and potential investors more receptive, especially since the massive Government Pension Investment Fund agreed to a stewardship code guiding money managers, he said.

“We’re seeing two big changes,” Kobayashi said. “It’s getting easier to get company management onboard. Potential customers also have a different attitude. Pension funds are actively adopting the code and becoming more interested in engagement funds.”

Prime Minister Shinzo Abe’s regime is seeking better governance as a means to improve Japanese companies’ earnings power. As well as rules for investor responsibility, the government backed the creation of a stock index that rewards businesses that use funds well. It also set a minimum target of 8 percent for return on equity at listed businesses.

Companies’ receptiveness today stands in contrast to when foreign activists landed in Japan in the 2000s with plans to shake up the nation’s capitalism and make companies pay out cash to shareholders. The country buttoned up and waited them out: in one high-profile example, Steel Partners sold its entire stake in brewer Sapporo Holdings Ltd. in 2010 after holding it for six years and failing to win board seats.

“Doing something hostile” doesn’t work in Japan, Heywood of Taiyo Pacific Partners said Oct. 14. “When guys do things that are seen to be without the consensus of the system, Japan reacts. It’s like a white blood-cell cleansing itself of impurities.”

The fable the engagement funds use to explain themselves resonates in Japan, as most people learned it in school. Fewer know where it hails from. Portuguese traders brought Aesop’s tales to Japanese shores in the 16th century. They were translated from Latin and escaped a ban on Western books when Japan closed its doors to the world.

Like the friendly activism they’re being aligned with, they turned Japanese.

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