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Business

Pushed by activist investors, Japan Inc. undertakes overhaul

TOKYO -- Japanese corporations are finally changing their managerial style in reassessing operations and picking top executives, heeding demands of foreign activist shareholders.

     Used-car auction operator USS Co. is raising its group dividend payout ratio 5 percentage points to 45% this fiscal year, after an overseas investor suggested that the 30 yen (29 cents) anniversary dividend offered in fiscal 2012 should be kept as part of an ordinary payout going forward.

     USS, the industry leader in Japan, is well aware that the capital investment that fueled its growth would not have been possible without funding from overseas shareholders.

     "Foreign investors, who supported us at a time when bank borrowing was difficult, are an important stakeholder for us," says Senior Managing Director Masafumi Yamanaka. Overseas investors give thumbs up to the attitude of USS, helping to boost its market capitalization to 440 billion yen -- more than seven times its annual sales of slightly more than 60 billion yen.

     Foreign activist shareholders seem to be behind other drastic corporate changes, such as Sony Corp.'s sale of its Vaio PC business and Tokyo Electron Ltd.'s merger with U.S. firm Applied Materials. Both Sony and Tokyo Electron are more than 40% owned by foreigners, and U.S. fund Third Point, a major shareholder of Sony, had called on the consumer electronics giant to scale back the PC business.

     "Companies with many overseas shareholders are leading the reform trend," says Takeyuki Ishida, executive director at U.S. proxy advisory firm Institutional Shareholder Services.

     Meeting shareholder demands, Omron Corp. has started disclosing its target return on invested capital, a profitability ratio. It has also educated its employees on the underlying elements of ROIC in an attempt to bring them closer to the perspective of overseas shareholders.

     Firms are even changing the way they choose executive personnel. Instead of having their presidents make all decisions, they have started adopting the Western management style of using external advisors. Swiss executive search consultancy Egon Zehnder International over the last two years helped about a dozen major corporations here choose their managers. "Demand started surging out of the blue," says Hideaki Tsukuda, representative of the Tokyo office. This is apparently because Japanese companies are seeing an increase in overseas shareholders, who are demanding high levels of accountability from top leaders.

     Still, experts agree that Japan Inc. as a whole is far from paying sufficient attention to shareholders. For instance, the Tokyo Stock Exchange in 2004 sought to introduce corporate standards of conduct -- a set of guidelines including having external directors -- which had already been adopted in the U.K, Germany and France. But the move was blocked by corporations and the powerful Keidanren business lobby. Momentum is finally gathering for the introduction of the standards.

     In the U.S., there are many cases of corporations having to satisfy the demands of activist shareholders. "If Japanese firms' share prices remain lower than their true value, they may face various demands from these shareholders," warns Toshio Tamura of Mizuho Securities.

(Nikkei)

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