Activist investors face long haul in Japan

By Nathan Layne and Tony Munroe

TOKYO (Reuters) - Activist investors in Japan scored few wins during this year's annual meeting season, and with companies erecting defences against them, their biggest impact has been to make governance a hot discussion topic.

Most Japanese companies have stable investors in the form of insurers and banks that have established cross-shareholding relationships to cement ties with their clients. They are unlikely to take management to task.

"I scratch your back and you scratch mine. But this has been gradually changing," Yuuki Sakurai, general manager of financial and investment planning at Fukoku Mutual Life Insurance, told the Reuters Japan Investment Summit.

"Maybe about 10 years ago we have said always yes, yes, yes, to the resolutions of the shareholders' meeting. Now we are not saying 100 percent to all resolutions. We always have to be sure that we have a reason for saying yes," he added.

News in May that U.S. hedge fund Steel Partners had ousted most of the board of struggling wig maker Aderans Holdings Co (8170.T) hinted at a new era of investors holding firms accountable for poor performance.

But even though activist funds put forth fewer and more targeted proposals on shareholder proxies this year than last, their calls for higher dividends and share buybacks were roundly dismissed.

Companies have meanwhile been rebuilding capital ties with business partners to help keep "unfriendly" shareholders in check, while introducing poison pill anti-takeover defence schemes to block anyone bold enough to launch a bid.

"Foreign investors are deeply disappointed with Japan's back-steps in regard to shareholder rights," said Kirby Daley, senior strategist at Newedge Group in Hong Kong.

"Japan will remain a major part of a global portfolio. However, it will be a diminishing part of the portfolio unless returns markedly increase in the near term."

The perception that Japan is inhospitable to foreign capital was compounded in May when the state blocked British activist investor The Children's Fund from doubling its stake in power company J-Power (9513.T) on national security grounds.

TIES THAT BIND

Investors in Japan would seem to have a legitimate gripe.

The average return on equity (ROE.L) for Japanese companies is about 9 percent, half that of firms in the United States. At the same time the dividend yield of Japan's TOPIX index is 1.6 percent, versus 2.2 percent for the Standard & Poor's 500 index .SPX.

Lax corporate governance and the lack of an active domestic shareholder base are largely to blame, analysts say.

After steadily declining, cross-shareholding has increased in the past two years, creeping up 0.3 percentage points to 20.4 percent of the country's market value in fiscal 2007, according to Nomura Securities. For a link to a graph, click here