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Thursday, Dec. 28, 2006

Murakami's influence will linger

Activist's quest for value empowered shareholders: expert


Staff writer

Yoshiaki Murakami's arrest was one of the biggest financial scandals of 2006, but the nation's best-known shareholder activist has played a pivotal role in persuading Japanese managers to be more attentive to shareholder interests, according to Marc Goldstein, head of Institutional Shareholder Services K.K.

News photo
Marc Goldstein, representative director of Institutional Shareholder Services K.K., speaks at his office in Chiyoda Ward, Tokyo, earlier this month. SATOKO KAWASAKI PHOTO

"He was really one of the first, if not the first, investor to focus on undervalued companies," said Goldstein, who analyzes management proposals for shareholders' meetings and provides vote recommendations to institutional investors similar to the Murakami fund.

As representative director of ISS, Goldstein pushes Japanese companies to work in the interest of shareholders. He said there are many firms in Japan that are trading below book value, meaning they would make more money by liquidating their assets than by being traded on the open market.

"In the United States, such a company will be the target of a takeover because it is so clear that there will be gains," Goldstein said in an interview. "Murakami was one of the first to see that it was possible to improve the value of those companies if you can convince them to make more effective use of the assets."

Murakami, founder of the Murakami fund, is on trial on charges of insider trading in shares of Nippon Broadcasting System Inc. Prosecutors allege that he bought 1.93 billion shares of NBS worth 9.95 billion yen through his fund on inside information that Livedoor Co. planned to acquire a controlling stake in NBS. He has pleaded not guilty, and his fund is expected to close in the near future.

Whether the former trade ministry bureaucrat is convicted or quits the investment business, there remain plenty of examples of the impact he has had on empowering shareholders.

In 2002, for example, Murakami launched a proxy fight against Tokyo Style Co. after obtaining an 11.9 percent stake in the women's clothing maker. Since Tokyo Style was sitting on a large pool of idle cash, he pushed it to pay higher dividends to shareholders.

The amount he sought -- 500 yen per share -- was 25 times bigger than the dividend Tokyo Style's managers had in mind. In the end, his proposal was voted down at a general shareholders' meeting. But the idea left a lingering impression.

"I think people recognized that there was fundamental logic in what he was doing," Goldstein said of Murakami, who is not one of his clients. "There are a lot of companies making inefficient use of what they have."

The incident eventually prompted Tokyo Style to raise its long-standing annual dividend from 12.5 yen per share to 20 yen per share. Even after that, Murakami continued to dog Tokyo Style management about increasing dividends or buying back shares.

Today, the Tokyo Style case is viewed as one of the incidents that prompted institutional investors to be more aggressive in pushing Japanese companies to better heed shareholders.

Until the late 1990s, companies' major shareholders were usually their main banks and business partners. They often held stakes in each other indefinitely as a way of maintaining good long-term business ties.

However, the same entities that had once been their most stable shareholders began selling off those stakes as the banking system started sagging under the weight of nonperforming loans. The shares eventually landed in the hands of institutional investors and individual shareholders.

Goldstein noted that institutional shareholders, including the Pension Fund Association, one of Japan's biggest, have become more active in proxy voting in the past five years.

Pressure is rising for pension fund managers to improve their returns as the graying of Japan accelerates, leaving fewer working people to fund retiree pensions.

"One way shareholders can push companies to improve returns is to examine carefully the proposals" submitted at the annual shareholders' meetings, Goldstein said. "As Japanese investors recognize the importance of proxy voting as a way of putting pressure on companies for them to be shareholder-friendly, they sign up with us."

ISS K.K. opened its Tokyo office in 2001 and has about 50 clients in Japan, making it the largest operation of its kind in the country. Its growing influence has attracted visits from company executives curious to hear their opinion on proposals slated for submission at upcoming shareholder meetings.

This year, ISS -- serving as proxy for institutional investors -- opposed almost all management proposals submitted for introducing poison pills -- a takeover defense that would let targeted companies issue new shares to dilute the bidding company's stake without shareholder approval.

Goldstein said many more firms are likely to submit poison pill proposals in 2007.

M&A activity in Japan is expected to rise after the ban on "triangular mergers" is lifted in May. Triangular mergers will allow the Japanese subsidiary of a foreign company to swap shares of its parent to acquire another Japanese firm.

But for Goldstein, the problem with M&As in Japan lies more in the independence of the companies' boards of directors. Or simply put, the number of outside directors.

"The biggest basis for opposing these resolutions (for introducing poison pills) is insufficient independence of the board," he said.

In the United States, the New York Stock Exchange stipulates that a majority of the directors at a listed company must be independent. A person cannot be an independent director if he or she has a direct or indirect relationship with the company, its parent or consolidated subsidiary.

But in Japan's case, there are still many outside directors who are effectively "insiders" at parent companies or their business partners, Goldstein said. Directors like these cannot be watchdogs for management, he said.

Meanwhile, the power of top management has been rising steadily because of a law introduced in May and other recent legal changes.

Under certain conditions, the revisions allow the board to decide on share buybacks and set dividends without shareholder approval.

The new corporate law was designed to give company executives greater flexibility in management. But in return, companies are obliged to draft policies that ensure their directors are fulfilling their duties properly under law or company regulations.

"If there aren't independent directors, then we can't support a takeover defense because there is too great a chance that it is going to be used just to entrench current management," Goldstein said. "What Japan needs is boards of directors focused on increasing corporate value."



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