How to Profit From Japan's Stock Market Shareholder Crisis
Stock-Markets / Japanese Stock Market Jul 01, 2009 - 08:09 AMBy: Money_Morning
Keith Fitz-Gerald writes: KYOTO, Japan - Mention Japan and many people think of Geisha, castles and samurai. Mention investing in Japan and the image of an impenetrable wall comes to mind.
I've been extremely fortunate to have seen all of this firsthand - and not just once, but on a pretty consistent basis for the past two decades, when I've been here as a businessman, a resident, and - most recently - as a husband and a parent. Like anyone who's lived as an expat anywhere for an extended stretch, my powers of observation have tuned into specific aspects of the Japanese culture that I find fascinating.
For instance, since the days of the samurai, rarely has anyone ever questioned anybody's authority directly - let alone openly. To do so was to risk the loss of one's head - literally. But for the first time in several hundred years, that reticence to challenge authority is ebbing, and it could be the change that prospective investors have long been looking for.
I recall watching in rapt fascination the whole T. Boone Pickens/Koito Manufacturing battle during my first years here. In case you don't recall, Pickens became Koito's largest shareholder by accumulating more than 20% of the company's stock and then was refused a seat on the board.
The battle came to a head during an annual meeting whose audience was filled with ruffians, embarrassed executives and a crowd of professional hecklers. I didn't understand until years later that there was nothing "random" about that day 20 years ago: The crowd had been stirred up intentionally and professional hecklers had been hired to deliberately break up the meeting. In fact, it was their job to keep Koito Manufacturing's senior executives from having to answer Pickens's pointed questions (although to outsiders, it would just look like some ne'er do wells had gotten out of hand).
Pickens would not be put down.
Much to the chagrin of my Japanese colleagues, I stood up and cheered when the American tycoon picked up his things and famously stormed out with a collection of Japanese media crews in hot pursuit.
Fast forwarding to the present, I find myself reliving those memories, for I'm watching a repeat performance unfold. The cast of players is a bit different - this time it's the Japanese investor, instead of a U.S. corporate raider, that's trying to buck the system - but the plot is much the same.
The normally reticent Japanese investors - long accustomed, or even resigned, to public subtlety and backroom wheeling and dealing - are becoming fed up with this system and are becoming quite brazen in their protests. And very direct, as well.
Pickens would probably love it. In fact, I'm virtually certain that he does, though I've not spoken with him in years.
According to a Nomura Securities Co. Ltd. research report cited here by several news media outlets, more than 70% of individual shareholders intend to vote against management in upcoming elections and on specific issues. Normally, shareholder votes are essentially "rubber-stamp" affairs, pretty much signing off on whatever management wants, so this is an earth-shattering change.
Western institutional investors have picked up on this cultural about-face, since it means they may finally have the voting clout they crave when it comes to obtaining board seats and operational input on how the trillions of dollars they've invested here over the years is put to work. I'm fascinated, because it means that the Japanese executives who up to now had only themselves to answer to must now answer directly - and publicly - to their own investors.
And there are many questions to be answered. Japan's stock market is at 26-year lows and recent economic reports continue to portray poor business conditions here. The so-called "green shoots" of economic recovery that are being written about in the United States look a lot more like weeds here Japan. And barring something miraculous that surfaces in response to the upcoming legislative elections, it's clear to me that Japan's elected leaders learned absolutely nothing from that country's so-called "Lost Decade" - a slowdown that's actually lasted the better part of two decades.
In fact, current Japan Prime Minister Taro Aso has an approval rating is only 19%, the lowest recorded level in history. Primary-schoolteachers are actually admonishing their students not to become like him. Can you imagine?
Openly angry investors I've talked with here in the last few weeks want to know why the return on equity has been so low for so long. They're asking how Japan's once-glorious companies have just fallen off the face of the earth? And then there's capital usage, investment spending and, gasp, the global financial crisis. Who knew what and when did they know it? This is going to get ugly. My father in law, who's normally calm about these things, wants them all lined up and thrown out - after he gets a chance to personally chew them out!
According to the Nomura study, executive compensation and skipped dividend payments are hot buttons, too, for individual investors - and with good reason. For the year ended March 31, about 38% of listed Japanese companies have skipped their dividends or have cut them entirely. For the typical Japanese citizen - who has accepted benevolent leadership for centuries -- this is not only a stunning breech of public trust, but a callous slap in the face that must have been similar to the waning days of the samurai, when various lords called "daimyo" could no longer meet the public obligations of their retainers.
To borrow an old expression, it's clear that the "natives are restless." And it's not just the natives. Such relatively recent Western "imports" as hedge funds and institutional money-management firms are feeling militant, as well.
Southeastern Asset Management Inc. is on the warpath over investments it's made in Nipponkoa Insurance Co. Ltd. The Tennessee-based fund manager owns approximately 17% of Nipponkoa and wants some answers as to why the company's shares have plummeted 19%, when the benchmark Topix Insurance Index has dropped only 6% in a comparable time period.
Twice now - in each of the last two years - Southeastern has attempted to oust Nipponkoa Insurance Co. President Makoto Hyodo for allegedly having run the ship aground.
In a similar fashion, Brandes Investment Partners LP sought a shareholder vote that would have forced Kyoto-based electronics manufacturer Rohm Co. Ltd. to buy back $157 million worth of company stock. Brandes, which owns about 6% of Rohm, felt that the $3.24 billion (311 billion yen) worth of cash and securities Rohm held was excessive, and presumably was a drag on the performance of the company's stock.
On Friday, shareholders sided with Rohm, and with Nipponkoa, in separate company meetings, and voted down the proposals of the two U.S. investors. But the fact that two U.S. institutional investors were brazen enough to launch these shareholder offensives in the first place says a lot about the new tenor of the times - and is clearly a sign of the things to come.
Things have gotten so bad that even Toyota Motor Co. (NYSE ADR: TM) - held out as the "gold standard" of Japanese business practices - is doing the unthinkable. Honorary Chairman Shoichiro Toyoda recently summoned 400 senior executives to a red-brick building in Nagoya - the very same building where his grandfather had manufactured textile looms a hundred years ago, according to a report last week by Bloomberg. The managers had likely expected a typically perfunctory update. Instead, the 84-year-old company patriarch berated the assemblage and scolded them for making some of the same mistakes that steered two of their U.S. counterparts into bankruptcy.
Shock amongst attendees doesn't begin to cover the reaction. "How many times have you made a mistake?" Shoichiro said to Katsuaki Watanabe, the Toyota president who the month before had been told he was being moved aside earlier than planned so that Shoichiro's son, Akio, could assume command of the carmaker.
Shoichiro suggested that Watanabe was so anxious to boost sales and profits that he'd emulated General Motors Corp. (OTC: GMGMQ) and Chrysler Group LLC - both of which are now bankrupt. Toyota, like the two American carmakers, allowed itself to become "addicted" to big expensive cars and trucks and forgot about the customer's needs to save money, added Shoichiro.
But as aggressive and "un-Japanese" as the actions illustrated by these few examples seem to be, they potentially don't hold a candle to the most pressing of all investor groups demanding action right now: Millions of angry Japanese housewives want to know where their husband's retirement funds went.
So what does this mean for the typical investor?
In the overall scheme of things, perhaps not much - at least, not yet. But stay tuned: Chances are good that if this "rebellion" continues, we could see true change here in Japan for the first time in centuries. And that may open the doors for some real investment opportunities and true forward-looking vision.
For those opportunities - and for the many lessons U.S. leaders (both corporate and elected) should take the time to learn from Japan's experiences - it's worth continuing to watch Japan.
You can be certain that we will. And we'll keep you updated.
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