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Activist bid to rewire Sony can help make Japan Inc. great again

Loeb's plans add weight to a much-needed push to assert shareholder rights

| Japan
Sony has been teasing with hints of another Walkman moment.    © Reuters

Few foreigners raise more hackles at Sony headquarters than American hedge fund manager Daniel Loeb.

Six years ago, the activist Third Point investor demanded that then-CEO Kazuo Hirai sell Sony's movie studio to focus on hardware and innovation. Hirai balked, and Loeb sold his Sony stake within 18 months. "Champagne for all!" wrote the then-finance chief of Sony Pictures in a leaked 2014 email.

Now, Loeb is back for take two, and odds are Sony officials will not be popping corks anytime soon.

Back in May 2013, when Loeb first showed on Sony's radar, Hirai's team argued they needed entertainment content to integrate with some game-changing device to be named later. Six years later, Hirai is retiring, investors are still waiting for that new platform and Loeb's narrative is becoming hard to ignore.

All this time, Sony has been teasing with hints of another Walkman moment. It promised to remind Apple that Sony has more to offer than a PlayStation business reaching the end of its cycle. Hence Loeb's return with an I-told-you-so investment, and this time he may get a happy ending. The competition from Netflix, Amazon and other movie and television upstarts may force Sony to heed reality.

Daniel Loeb's return to Sony makes a timely test case.    © Reuters

Japan Inc., too, as investor activism flourishes to challenge the status quo.

The difference between today and 2013 is Prime Minister Shinzo Abe's drive to prod investors to be more assertive. Along with introducing a U.K.-inspired stewardship code in 2014, Abe encouraged domestic retail punters to find their voices. Since then, demands to boost dividends, spin-off non-core assets, reduce cross-shareholdings and alter board structures have grown in frequency and volume.

Not a revolution, but clear progress. In 2018, 47 Japanese companies faced reform proposals from investors, according to consultancy Activist Insight. That is a 40% jump from 2017.

The momentum looks set to grow in view of a meeting Monex Group, a Tokyo-based securities broker, plans for May 19. The idea is to bring foreign and domestic activist funds together with Japanese retail investors. The timing is no coincidence -- a month before the annual rush of Japan Inc. shareholder meetings.

Japan has seen countless false dawns on the activism front. What is notable, though, is how overseas investors are also looking beyond icons like Sony and camera-maker Olympus. Take the 5.1% stake New York-based Fir Tree Partners took in Kyushu Railway. Fir Tree began betting on the western Japanese company in 2016 and quietly raised its stake. Only in January did it disclose the scale of its wager.

Fir Tree's demands are rather typical of foreign activists: put greater focus on shareholder returns; buy back 15% of outstanding shares; introduce stock-based remuneration for management. Yet Abe's corporate-governance push makes it harder for executives and friendly shareholders to circle the wagons.

Last month, institutional investors called for the ouster of top management at Lixil Group, a housing products maker. Targets of this exceedingly rare maneuver include CEO Yoichiro Ushioda amid accusations of opaque decision-making. Only time will tell if Marathon Asset Management, Indus Capital Partners and two other firms agitating for change get their way. But the genie seems out of the proverbial bottle.

Electronics group Maxell Holdings has its own headaches with foreign and domestic funds, which have taken stakes totaling 30%. The same goes for RicohJapan Display, Toshiba and Dai-ichi Life which Singapore-based Effissimo Capital Management has stakes. The fund is run by former colleagues of Yoshiaki Murakami, perhaps the best-known Japanese activist.

Japan Inc.'s coldness to shareholder views is under assault from the top down, Abe's government, from the bottom up, domestic punters, and from the outside. The non-Japanese funds, of course, garner the most attention. Historically, offshore activists were demonized as "foreign vultures" scheming to pillage corporate icons.

Admittedly, hedge fund managers like Loeb are motivated by profit, not altruism. But stronger governance can be a win-win for Japan's 126 million people. Better run companies that restore Japan's innovative greatness could create new jobs, raise living standards and enhance the global influence of Tokyo, Osaka and other metropolises.

Unfortunately, headlines out of corporate Japan have recently been discouraging. Carlos Ghosn's brawl with Nissan Motor has done the reputation of Japan's third-biggest automaker no favors. Nor have scandals at Toshiba, Olympus and other household names buttressed Abe's reformist bona fides in global markets.

Yet Loeb's return to Sony makes a timely test case. Sony's innovative slump and complacency since the 1980s is often viewed as a microcosm of Japan's journey. Like Japan, Sony once set the global standard for inventiveness. It lost its mojo and, like Abe's economy, is struggling to regain confidence. That makes it a proxy for national change.

Sony is indeed in the midst of a turnaround effort, helmed by Kenichiro Yoshida. Before Chairman Hirai named Yoshida CEO in February 2018, Yoshida was chief financial officer. He scrapped the money-losing personal computer business and took a scalpel to the flagging TV unit. He announced big layoffs and a $1.7 billion write-down on smartphones. Now, Yoshida is mulling even bigger cuts to the money-losing mobile unit -- including shedding 2,000 jobs.

Loeb wants Yoshida to go further. That includes exploring options for Sony Pictures, which may be ripe for a takeover by Netflix or Amazon. Loeb also calls on Sony to explain how its semiconductor and insurance divisions will enhance future profits.

The size of the New York-based activist's latest Sony stake is yet to be disclosed. Third point has about $14.5 billion under management. According to Reuters, it is creating a special investment vehicle to raise as much as $1 billion to buy more Sony shares. The 9% rally on Tuesday alone, though, suggests investors hope Loeb succeeds in refocusing Sony.

Loeb is a regular feature in Japan Inc. circles. He has bet on everything from robot maker Fanuc to Seven & i Holdings, the retailer, and Suzuki Motor. His Sony sequel may be hitting the market at the ideal moment. Loeb is joined by other global activists including Argyle Street Management (pushing for change at Toshiba), Elliott Management (Japan Hotel REIT Investment), Oasis Management (electronics maker Alps Alpine), and others.

Even more important, these foreign funds may be finding unlikely allies among Japanese retail investors just as annual general shareholder meetings begin. These local punters are tired of being taken for granted and they have a powerful ally in the prime minister.

Japan still has a long way to go to raise its corporate game to international standards. But it does at long last appear to be moving in the right direction -- and giving long-suffering shareholders a reason to put the Champagne on ice.

The article has been amended to clarify the ownership of Effissimo Capital Management.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia for his Nikkei Asian Review work.

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