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Shareholders prevail in Lixil showdown, restoring ousted CEO

Overseas investors win Japanese institutions over in fight for board

Newly returned Lixil Group CEO Kinya Seto speaks to reporters in Tokyo on June 25. (Photo by Toshiki Sasazu)

TOKYO -- Top Japanese building materials supplier Lixil Group brought back ousted Kinya Seto as CEO after Tuesday's shareholders meeting, marking a victory for international investors in their roughly eight-month battle with management.

All eight directors nominated by shareholders were voted in, including Seto, seizing the majority of the 14-member board. Meanwhile, two of the eight named by the company were rejected.

Two of the shareholders' nominees -- both outsiders -- were also on the management slate. But they were first nominated by Seto's side.

International investors that questioned Seto's dismissal last year -- a group that included U.K.-based Marathon Asset Management -- were able to rally some typically conservative Japanese institutional shareholders to their cause in Tuesday's vote.

The outcome suggests a turning point in Japanese corporate governance, with shareholders asserting that management proposals can no longer pass without scrutiny.

Lixil's dysfunctional governance could not be ignored, said Howard Smith, a partner at U.S.-based Indus Capital Partners.

Foreign investors own about 40% of Lixil, whose kitchen and bath brands include American Standard and Grohe.

"I'm just happy that I was able to come back," Seto told a news conference later Tuesday. "We will be one team from now on," he said.

Seto, an industrial supplies industry veteran who started his own company, said he aims to boost productivity at Lixil, with a goal of turning a net profit this fiscal year after a 52.1 billion yen ($485 million) loss for the year ended March 31. "High fixed costs are our challenge," he said.

He denied reports that the Tokyo-based company has plans to relocate its headquarters to Singapore or launch a management buyout.

The management turmoil began last October, when Seto was essentially forced out as CEO and replaced by Yoichiro Ushioda, from one of the group's founding families.

Marathon and three other overseas institutional investors denounced the lack of transparency regarding that decision. They called for an extraordinary shareholders meeting to remove Ushioda and other directors.

Ushioda announced in April that he would step down as CEO and from his remaining posts.

Seto's fate Tuesday ultimately rested with domestic institutional investors, which own roughly 30% of Lixil's stock.

It is rare for investors in Japan not commonly considered activists to challenge a company's nominees. "This must be the first time directors nominated by shareholders were voted in at a company of this size," said Yutaka Suzuki of the Daiwa Institute of Research.

Japanese institutional investors are generally supportive of proposals made by companies, especially when they are bound together by cross-shareholdings.

But a 2017 revision to Japan's Stewardship Code requires institutions to disclose their votes on each agenda item. They now risk losing capital entrusted to them by pension funds and others if they are seen voting against shareholders' interests.

"Sustaining the business is top priority," said a representative from a major Japanese brokerage that voted for Seto's reappointment. "When we thought about who should become CEO, the shareholder side's case was convincing."

"The company leadership's strategy was unclear," said a source from another brokerage that backed Seto.

Many investors were also leery of the company's slate of directors, which was picked by a nominating committee when Ushioda was CEO. "We could not trust nominees chosen by a committee that was still under Ushioda's influence," a source from an institutional investor said.

Tuesday's annual meeting drew more than three times as many shareholders as attended last year.

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