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News Navigator: Who are shareholder activists and what do they do?

Recently, "shareholder activists" have come to the fore. They are investors who buy company shares in large amounts, express their own ideas to senior management about how the firm can improve -- in the hope of rising share prices and increased cash dividends. If they are unhappy with the way senior management is operating, they sometimes propose their own candidates to become board members, and aim to secure approval from other shareholders. Between 2000 and 2009, Yoshiaki Murakami, a former bureaucrat at the then Ministry of International Trade and Industry, who became famous with his "Murakami Fund," was a particularly active shareholder activist.

    Question: It seems that there are some "shareholder activists" within Toshiba Corp., which is undergoing business reconstruction, right?

    Answer: In November 2017, Toshiba decided to increase capital by about 600 billion yen (about $5.6 billion) in order to clear its huge debts. The plan involved roughly 60 investors, mainly based overseas, with specified third-parties taking on new shares. The investors included shareholder activists such as Effissimo Capital Management Pte Ltd., which was founded by a person previously involved in the Murakami Fund, attracting public attention. Investors in Toshiba apparently believe that they will eventually make huge profits as shareholders if the corporate value of the embattled electronics giant increases at a later date.

    Q: Are shareholder activists really increasing?

    A: Any investor that buys more than 5 percent's worth of shares in a listed company is obliged to submit documents such as a large shareholding report to the government. Nomura Securities Co. conducted a probe based on these documents into the number of investors holding a large amount of shares that were bought in the hope of business improvement. As a result, it was found that the number of such investors increased from 83 in 2016 to 103 in 2017. This is the highest number since 133 in 2008.

    Q: Has there been an increase in shareholder proposals at shareholder meetings?

    A: In a survey of approximately 2,600 listed firms conducted by the Japan Institute of Business Law, to which the reply rate was greater than 90 percent, the number of firms experiencing shareholder proposals was about 30 per year until several years ago. However, in the year building up to June 2017, the number of such firms exceeded 50. At a shareholder meeting of the Osaka-based electronic parts trader Kuroda Electric Co., major shareholders including Murakami's eldest daughter suggested the appointment of their preferred candidate for the role of external board member -- with the suggestion being approved by a majority.

    Q: Why has there been an increase in this kind of activity?

    A: Large-scale credit relaxation has resulted in a state of surplus money. In addition to shareholder activists gaining increased financial muscle, the government has been pursuing corporate governance reforms through methods such as strengthening external business surveillance.

    In 2014, the Financial Services Agency drew up what it called the "Stewardship Code," which is essentially a set of principles that corporate investors are expected to follow. Under the code, investors are asked to perform surveillance of potential investment destinations, and switch from being a "silent shareholder" to a "shareholder activist." Meanwhile, under a guideline for listed companies introduced by the Tokyo Stock Exchange in 2015, called the "Corporate Governance Code," in cases where there is cross-shareholding between firms, it is requested that the rationality of the cross-shareholding is explained.

    Q: Why?

    A: The aim is to keep collusion in check. Both those guidelines partially overlap with shareholder activists' assertions, and serve to create an environment in which management teams can be urged to improve.

    Q: So shareholders should express their opinions more, right?

    A: Of course, there are differences in opinion between shareholders. At a Toshiba shareholder meeting in June 2017, the firm suggested the appointment of certain board members but Mizuho Trust and Banking Co. opposed the suggestion, stating, "They made the decisions that led the company to fall into a state of excessive debt." Meanwhile, Sumitomo Mitsui Trust Bank Ltd. said that, "Creating more confusion will negatively affect the shareholder value."

    Aside from the pros and cons concerning a policy toward a company, it is predicted that shareholders will monitor business operations much more in the future. Looking ahead, the extent to which shareholders can contribute to the improvement of corporate governance will come under the spotlight.

    (Answers by Mikako Yokoyama, Business News Department)

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