Activist investors face long haul in Japan

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

On top of that, roughly 500 Japanese companies have introduced poison pills, giving them the option to issue stock warrants to dilute the stake of an unwanted suitor, as Bull-Dog Sauce (2804.T) did to ward off Steel Partners last year.

But that doesn't mean all is lost for the activist camp, which continue to plug away despite backlash from some company managers and some media outlets.

California-based Dalton Investments is targeting companies for management buyouts and raising money to invest in struggling Japanese real estate investment trusts it feels can be turned around with better corporate governance.

"Activism is a sensitive issue for Japanese," Junichiro Sano, head of the Japan affiliate of Dalton, told the Reuters Summit.

"We are value investors and in America it is thought of as normal for us to be vocal. The situation is right for this concept to also be accepted in Japan."

Regulators also appear to be warming to overseas funds in the interest of keeping foreign capital from fleeing Japan. The government has recently relaxed its tax code so foreign asset managers and hedge funds can avoid dual taxation.

Takafumi Sato, commissioner of the Financial Services Agency said at the Summit that funds play a key role in the capital markets by promoting dialogue between management and shareholders.

"Funds in general play a positive role," he said.