2007 Reports

Investors Unleashed: The Rise of Shareholder Activism in Japan

From the Western point of view, Japanese companies remain mired in tradition and are very inefficient. Given objective measures of efficiency and profitability, it is hard to argue against this characterization, particularly for domestically focused Japanese companies. However, one important change that has been occurring is the recent steep reduction in the number of cross-shareholdings in the Japanese equity market. These new shareholders are anxious to have a say in the actions of management, and they are becoming agents of change in stodgy companies that must evolve in order to survive. Activist investors have proven a successful force for change for U.S. companies, and they are finally making some inroads in Japan. There have been many stumbling blocks, including negative public and government opinion, resistant management, and legal and regulatory issues that previously made it hard for activists to purchase a block of shares. That said, even despite some high-profile prosecutions over the last two years, the tide has begun to change, and the Japanese vernacular media and public have increasingly been backing activist investors in their quest for better management of firms. Mr. Fusa first explained that private equity firms take control of the company and change the way things are run from the inside, while hedge funds take control over a block of shares and try to shake things up from the outside. His view is that hedge fund players can often earn more money due to the additional management fees charged to clients, as well as the fact that private equity firms usually have to pay a higher entry premium to gain control of a company. Mr. Fusa compared the current Japanese market to where the U.S. market was 20 years ago, which is around the time private equity firms in the United States really shook up an inefficient marketplace and there was a boom for hostile takeovers and, therefore, for the economy. Regarding hedge fund activism, Mr. Fusa expressed the importance of making a large investment in a company if there are prospective strategic buyers willing to purchase at a premium. Professor Milhaupt remarked on the importance of the legal environment for takeovers. He discussed Japan's embrace of U.S.-style defensive mechanisms for hostile takeovers in the last couple of years and the advent of poison pills. He noted, however, that the city code of London would have been a better style of defensive mechanism for Japan because a board neutrality principle, coupled with a mandatory bid rule, would have done much more to enhance shareholder value. According to Professor Milhaupt, there is reason to be optimistic about the court system's dealing with hostile takeovers and, specifically, its record on striking down poison pills that are harmful to shareholders. He fears that the image that Japan's financial regulators are engaging in selective prosecution is dangerous for the Japanese capital markets.