TOKYO -- Japan's push to reform corporate governance has brought back foreign activist investors.

London-based Asset Value Investors recently proposed that Tokyo Broadcasting System Holdings, a key Japanese broadcaster, distribute to shareholders 40% of its stake in Tokyo Electron, a semiconductor production-equipment manufacturer.

The proposal by the activist fund targets strategic shareholdings, which Japan's corporate governance code encourages to be trimmed gradually unless there is a compelling reason to do otherwise.

"If we demand a cash return, we cannot bind TBS where to source it from," said AVI's consulting lawyer Stephan Givens at a news conference on Thursday, when asked why the boutique fund is interested in distributing shares instead of cash. "We would like to emphasize that it is a problem about strategic shareholdings."

To emphasize its commitment, AVI has even launched a website, "Improving TBS," that explains the proposal's intent and negotiations.

TBS quickly issued a statement opposing the proposal, insisting that Tokyo Electron is a good investment as its shares were acquired long ago at minimal cost. AVI countered by saying, "Historical investment costs, or sunk costs, are irrelevant to current investment decisions."

"This poor grasp of basic investment economics should give TBS shareholders reason to question whether TBS management adequately comprehends the significance of other equally fundamental concepts such as capital efficiency and shareholder return," AVI added. 

Earlier this year, AVI CEO Joe Bauernfreund described TBS as an amateur fund with a small broadcasting business.

Also on Thursday, ValueAct Capital filed a large shareholding report, revealing that it has a 5% stake in Japanese camera manufacturer Olympus. The San Francisco-based investor -- with assets worth $14 billion -- is known as a moderate activist, but was involved in the ousting of Steven Ballmer from his CEO post at Microsoft. 

Although Olympus is known as a camera maker, most of its current revenue comes from medical devices such as endoscopes as its camera business declines. ValueAct has yet to propose anything to Olympus, but the market is curious about what the fund is up to. 

According to QUICK-FactSet, 16 major activists in Japan and abroad at the end of March held a combined 1.59 trillion yen ($14.5 billion) of outstanding Japanese shares. The record figure represents a 20% increase from 12 months earlier, and a three-fold rise from the recent low in 2012. This is contrary to the global trend. According to a British research firm, 805 companies were targeted by activists in 2017, about 4% less compared to the previous year.

About a decade ago, a different generation of activists would buy bulk amounts of a company's shares, then make demands for higher shareholder returns.

In 2007, activist investors like Steel Partners of the U.S. were targeting Japanese companies like Sapporo Holdings, Bull-Dog Sauce and Aderans.

Steel Partners would threaten to take over a company after acquiring a chunk of its shares, though the firm's holdings at the time reached less than 400 billion yen.

Bull-Dog Sauce executed anti-takeover defenses against Steel Partners, becoming the first Japanese company to do so. The investment firm then filed a complaint with the Tokyo High Court, which ruled against the activist and even labeled it an "abusive acquirer which pursues short-term profits."

The event led many Japanese companies to introduce defensive measures. 

But the activism that is rising today is somewhat different, and companies are now beginning to move away from these measures.

This time, two new legal sets of rules have activist investors finding allies in corporate Japan's long-term stock holders, like pension funds and insurance companies.

The corporate governance code encourages companies to talk with investors about how to enhance corporate value. The stewardship code, meanwhile, urges institutional investors, who tend to keep their shareholdings for long periods of time, to nudge investee companies to maximize value.

These codes are part of the Japanese government's campaign to promote corporate governance reform, which seeks to shift the country's classic corporate-centered management style to one that is more investor-friendly. Currently, activists are the ones riding high.

On March 21, during a general shareholders meeting of GMO Internet, a proposal by a Hong Kong-based investment fund nearly forced the internet company to scrap an anti-takeover measure.

The proposal by Oasis Management won 45% of shareholder votes even though the fund in January held only 6% of GMO's shares, while company founder and group CEO Masatoshi Kumagai owned 40%. According to the vote's result, about 80% of the shareholders other than Kumagai sided with Oasis Management.

"Since it was a decent assertion," an executive of a Japanese asset management company said, "it was natural to endorse it."

In Japan, long-term institutional investors used to be called "mute" due to their unwillingness to take stands on investee companies' affairs. But now the stewardship code pressures them to show their positions on individual proposals at general shareholders' meetings. If they bow to this pressure, they show their cards, so to speak. As a result, they find it difficult to vote against proposals that clearly make sense.

Seth Fischer, founder and chief investment officer of Oasis Management, is currently confronting the management of Alpine Electronics, a Tokyo auto parts maker. He opposes the company's plan to become a wholly owned subsidiary of Alps Electric, Alpine's parent. Instead, he is demanding Alpine hire two new director candidates he has nominated and that it pay out a special dividend.

Seth Fischer, founder and chief investment officer of Oasis Management, is demanding Alpine Electronics hire two director candidates he has nominated and that it pay out a special dividend.   © Reuters

A key force supporting activist investors is "unthinking" funds, especially exchange traded funds, designed to track market indexes. When Trian Fund Management last year initiated a proxy fight against Procter & Gamble, whose market capitalization is more than 20 trillion yen, the fund manager, which only held a few percent of the company, managed to win. A pension fund and some other P&G shareholders sided with Trian, inducing automatic support from the unthinking shareholders.

As this case demonstrates, a key factor for activist investors is drumming up support from influential shareholders.

"If the board of directors' decision reflecting a minority shareholder's wish has ended up taking away an opportunity for all of Xerox's shareholders to make a judgment, that is regrettable," Kenji Sukeno, president and chief operating officer of Fujifilm Holdings, said on May 18. He voiced this thought after explaining that top shareholders, including Carl Icahn, who opposed a Xerox takeover by Fujifilm Holdings, have a combined stake of around 15% in the U.S. office equipment company.

The dispute lingers, and if the opposing parties are to again face off at a general shareholders meeting, institutional investors -- Vanguard Group, BlackRock and State Street among them -- will cast votes.

AVI aims to gain the support of Japanese financial institutions. "Many financial institutions take strategic holdings as not good, and are working to reduce theirs," said Givens. "If they disagree with AVI's proposal, there is an inconsistency they rationally have to explain."

June is when annual general shareholders meetings take place in Japan. The push from activists coupled with the two codes may finally force corporate Japan to pursue capital efficiency.