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Saturday, June 24, 2006
Investors get more vocal on management decisions
Over the past several weeks, company executives have been beating a path to Pension Fund Association's door, trying to get the investment manager to agree with proposals they plan to submit at their shareholder meetings.
"The number of visitors we get has been doubling every year," said Taku Yamamoto, who oversees PFA's investments. "Recently, we have been extremely busy meeting with corporate leaders."
Officials at the association, one of the nation's biggest institutional investors, have been listening to details of the resolutions and, at times, asking them to change parts of the proposals to "better reflect PFA's views."
Meetings between firms and their major institutional investors increasingly are becoming part of the preparation for annual shareholders' meetings.
The shareholders' meeting season runs from mid- to late June and of the 1,808 companies listed on the Tokyo Stock Exchange that closed their books at the end of March, 1,003 of them will hold their meetings Thursday.
The visits to investment managers show just how much shareholder meetings have changed in recent years as investors -- both institutional and individual -- become more diverse and vocal.
In the past, the annual meeting of shareholders -- the top decision-making body of a listed company -- would usually be choreographed by management. It would tell its shareholding employees to sit at the front during meetings and support the management position.
"They would be instructed to shout and applaud in approval so that any criticism from other shareholders would be drowned out," said a former official of a major trading company, who asked not to be named. The shareholders' meeting "usually ended in 15 minutes . . . the shorter the better."
But after decades of staying quiet, many institutional investors, including PFA, which channels some 4.5 trillion yen of its roughly 12 trillion yen in investments into domestic firms, are now flexing their muscles and forcing corporate leaders to pay more attention to them.
Last year several institutional investors, including PFA, voted down poison pill resolutions submitted by management at Yokogawa Electric Corp. and Fanuc Ltd. that would have allowed them to raise the ceiling on the number of shares they could issue.
The poison pill measure prevents hostile takeovers by diluting the aggressor's stake, but it also reduces the stakes of all other shareholders.
Revisions to the Corporate Law that took effect in May give companies a wider range of options when introducing steps to counter takeover bids. And many companies hope they can introduce them without shareholder approval.
In April, PFA revised its policy on exercising its shareholder voting rights on proposals for countertakeover measures.
Its position is that in some cases a takeover can result in better business results -- good news for shareholders -- so the association is cautious when executives present measures to protect the company, when they may only be trying to keep their positions secure.
PFA's new policy is that it will vote against resolutions to change directors on the board if the firm introduces a defense mechanism without first consulting shareholders at a general meeting.
Koji Morioka, a professor of economics at Kansai University, said the relationship between companies and shareholders has become more balanced than in the past, when shareholders essentially had no say in management.
"When Japan's economy declined in the 1990s, many companies went bankrupt or falsified their financial reports," Morioka said. Subsequently, "shareholders began to demand transparency and accountability in the corporate decision-making process."
Analysts also say that the number of institutional and individual investors who expect capital gains has increased in recent years, leading to more calls for management to boost corporate value, and raise share prices and dividends.
Until the late 1990s, major shareholders in companies were often banks and other firms. They usually held each other's shares indefinitely as a way of maintaining good business ties.
However, this network of cross-shareholding crumbled as banks' health sagged under the weight of nonperforming loans and many big companies fell into the red. This, combined with the lengthy slump in stock prices, caused them to get rid of their stocks.
Entities that had once been stable shareholders began selling off their stakes. Those shares eventually ended up in the hands of institutional investors and private shareholders.
According to a joint survey by the nation's five bourses -- Tokyo, Osaka, Nagoya, Fukuoka and Sapporo -- shares purchased by foreign and individual investors accounted for a record 45.8 percent of stocks listed on the exchanges in fiscal 2005, while corporate entities acquired 21.1 percent.
In comparison, a survey for fiscal 1996 shows foreign and individual investors bought 31.3 percent, and corporate entities took 25.6 percent.
The rise in the number of individual investors is also influencing corporate leaders and many have begun to communicate more with them.
Asahi Breweries Ltd., where the number of individual shareholders ballooned to 96,000 in 2005 from 38,000 in 2002, held a party after its March shareholder meeting. Investors got the chance to chat with company executives, including the president and chairman, over Asahi beverages.
Avex Group Holdings Inc., which includes music company Avex Entertainment and music software company Avex Network Inc., plans to hold a concert of musicians signed to the label after its shareholders' meeting Sunday.
"We want our shareholders to be our fans and support our company with us," Avex Group spokesman Taishi Arashida said.
This year's shareholders' meeting season comes just weeks after the arrest of Yoshiaki Murakami, founder of the Murakami fund and a shareholder activist, on allegations of insider trading.
Many individual investors have admired Murakami for fighting for greater shareholder rights.
Kansai University's Morioka -- who described Murakami as a greenmailer -- said his arrest would not curb the flow of individual investors into the stock market.
"Members of the general public with small amounts of stocks are indeed increasing their say" in corporate management, he said.