UPDATE 4-Former CEO of Japan's Lixil returns after governance tussle

* Kinya Seto returns as CEO after leaving in October

* Case seen as test for corporate governance in Japan

* Focus should now be on profitability - Jefferies (Recasts, adds CEO quotes)

TOKYO, June 25 (Reuters) - The former chief executive of Japanese toilet maker Lixil Group was reinstated on Tuesday after shareholders backed him at an annual general meeting (AGM), likely marking a high-profile victory for corporate governance in Japan.

The decision to bring back Kinya Seto caps a months-long saga widely seen as a test case for governance and minority shareholder rights in Japan Inc. His abrupt resignation in October prompted a revolt by minority shareholders.

Seto had argued that Lixil and other companies in Japan are controlled by an old guard of management “kingmakers” who prioritise their interests over shareholders’. The man who briefly replaced him as chief executive, Yoichiro Ushioda, hails from one of the company’s founding families and had blamed Seto for the company’s poor performance. Ushioda and his chief operating officer have resigned, the company said.

“Today is not a goal, just a starting line. As I am able to be on the starting line, I want to make this company a winning company again,” Seto told a news conference, shortly after his appointment was announced.

It was not immediately clear whether Seto’s reinstatement would bring an end to the boardroom drama, as shareholders also endorsed several board members backed by the previous management.

Activist investors have been gaining momentum in Japan and have complained about what they see as poor performance as well as returns from cash-hoarding firms, with Prime Minister Shinzo Abe advocating strengthening corporate governance.

But companies are often able to ignore minority investors given the longstanding practice of cross-shareholding, where firms hold stakes in each other to cement business ties.

Seto’s reinstatement came after shareholders at the AGM endorsed him and five other candidates that he had backed. A further six candidates proposed by management were elected to the board, while two appointees were supported by both sides.

Two candidates from the management side did not win enough support.


“We finally see Lixil Group resuming normal operation under a management team that most benefits the company,” Jefferies analysts Sho Fukuhara and Zuhair Khan said in a note.

Fukuhara told Reuters he expected Seto to focus on improving profitability at Lixil’s domestic business.

Lixil emerged as a test case for Japan’s governance reform after four investment firms in March called for Ushioda to leave the company’s board along with the chief operating officer, Hirokazu Yamanashi.

The investors cited what they said was a lack of governance after Seto abruptly resigned in October and was replaced by Ushioda. Seto later submitted shareholder proposals on a slate of new board members to be voted at the AGM.

One 66-year-old retiree from Tokyo, who declined to give his name, said he has lost about 500,000 yen ($4,700) on Lixil shares over the past four years. He said he backed the company’s proposals, but added that founders should not be on the board.

“If founders are on the board, there are always some deals behind the scene,” he said.

$1 = 107.1000 yen Reporting by Junko Fujita; Writing by David Dolan; Editing by Muralikumar Anantharaman and Mark Potter