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International activist funds have stepped up the pace in Asia, with a new set of homegrown players close behind. From left: Elliott Management's Paul Singer, Oasis Management's Seth Fischer and ValueAct Capital's Jeffrey Ubben (Source photos by Reuters and Getty Images)
Cover Story

Activist funds take aim at Asia Inc's complacent boardrooms

Rising number of Asian companies under pressure over governance

SINGAPORE/SEOUL/HONG KONG -- Seth Fischer lives in hope.

For years, the founder and chief investment officer of Oasis Management has been putting pressure on Japanese companies to radically change the way they operate. His goals have been the same as those pioneered decades ago by "activist" investors in the U.S.: to shake up complacent boards, push companies to shed underperforming businesses and to make them more transparent about the way they operate.

Despite a few victories, however, the revolution inside Japan Inc. has never quite taken off. Yet Fischer insists that the change he has sought for so long is now at hand.

"I feel like, finally, we have much more opportunity to have influence over management," Fischer told the Nikkei Asian Review. "The management is much more open, sensitive and available to improve their governance to drive value for everybody. We are getting a lot more responses from management than ever before ... and not just words."

Other foreign investors are beginning to share Fischer's optimism. Campaigns by activists surged in Japan in 2018, with 47 Japanese companies facing demands from investors. This was up 40% from a year earlier, part of a broader upswing in activist campaigns in Asia. Challenges from investors rose nearly 20% in Asia last year, second only to the U.S. in terms of activist investor activity, according to consultancy Activist Insight.

Proponents of this aggressive form of investment say it spurs ossified companies to take actions that they were either too complacent or too corrupt to take on their own. But critics say activists can force companies to place short-term gain ahead of long-term strategic planning.

Backers of investment activism can point to a recent big victory in Japan, when scandal-plagued Olympus announced in January that its board would accept a director from ValueAct Capital, a U.S. activist fund. Corporate governance at the camera and medical device maker has been under withering scrutiny after a $1.7 billion accounting scandal broke in 2011.

"The interests of the two [Olympus and ValueAct] are in line with each other in terms of enhancing corporate value," said Yasuo Takeuchi, chief executive, after the announcement.

For Olympus shareholders, the activist pressure has paid off so far. The stock has risen by about 40% since the end of last year, based on investor expectations that a radical restructuring will follow the appointment of ValueAct partner Robert Hale to the board.

The activists' jobs have become somewhat easier after steps taken four years ago by Prime Minister Shinzo Abe's government to overhaul Japan's corporate governance code. Measures were taken to encourage transparency, with companies compelled to disclose information on reducing cross-shareholdings and other policies. More recently, the Financial Services Agency has been moving to require disclosure on how executive pay is determined.

With activism in Japan at an all-time high, companies are facing unprecedented investor pressure ahead of their annual general meetings in June.

Olympus has been under pressure since 2011, when then-CEO Michael Woodford, pictured, blew the whistle on a $1.7 billion accounting fraud scandal. This January, the company bowed to demands by activist fund ValueAct Capital.   © Kyodo

Fischer, for one, is taking an aggressive stance. He is proposing slates of new directors at a number of companies, insisting that board members should have "expertise in their fields, not just [be] lawyers and accountants." Fischer is also preparing campaigns against poison pills -- provisions designed to prevent takeover attempts -- and demanding higher dividends from companies with low payout ratios.

After the June meetings, Fischer predicts, Japan Inc. will have "a lot more diversified boards."

Another scandal-tarred Japanese company, Toshiba, is finding itself under pressure from activists. In March, U.S. investment company King Street Capital Management sent a letter to Toshiba's CEO, Nobuaki Kurumatani, saying the company needs new independent directors to "fully maximize its industrial strengths and empower the innovative potential of its employees."

The Toshiba board "must provide a renewed sense of urgency, assertive decision-making and a profitable growth mindset to unlock Toshiba's value," the letter said.

Takuya Shigaki, a 31-year-old veteran of Goldman Sachs and Oasis Management, set up his own activist fund last year in Singapore to take advantage of Japan's more activist-friendly climate. His company, Lone Alpha Capital Management, approached its first target in January -- though he declines to give its name.

"I want to encourage corporate action through intensive discussion with the management team," he said. "That could lead to a revitalization of the Japanese economy at last."

Koichiro Doi, head of Japan M&A at J.P. Morgan, says activism comes in three phases.

"The first step is capital policy, such as share buybacks. The second step is the acceptance of outside directors. The third step is a drastic review of the business," he said. "The Olympus case shows that Japan has finally reached the second [stage]."

"Shareholder activism could change the corporate culture in Japan Inc. and reallocate the capital for growth strategy," said Haruo Nakamura, deputy president of Mitsubishi UFJ Morgan Stanley Securities.

Countering the chaebol

Shareholder activism heightened in the U.S. in the '80s, an era when "corporate raiders" such as Carl Icahn and Nelson Peltz sometimes sought to break up companies to unlock value. John Paulson, Lens Fund's Robert Monks, and Paul Singer, the controversial founder of Elliott Management, have also made fortunes as activist investors. They gained notoriety for their sometimes ruthless tactics -- none more so than Singer, whose 15-year pursuit of roughly $600 million worth of Argentine bonds included the seizure of a docked Argentine Navy ship.

These early activists fought against the lax management of companies, and often forced them to undergo radical restructurings. In the 1990s they exported the activist model to Europe, where they pressured conglomerates to sell inefficient businesses.

Activism first arrived in Japan in the late 1990s, when many companies were struggling after the collapse of the bubble economy. Yoshiaki Murakami, a former bureaucrat, established the first activist fund in Japan, "Murakami Fund," in 1999. Steel Partners, a U.S.-based activist investor, was also active in Japan. But their assertive communication styles were rejected by Japan's business society, where the corporate culture is based on cooperation and consensus-building.

Attitudes had started to change by 2013, when Daniel Loeb, CEO of Third Point, pushed Sony to conduct a partial spinoff of its music and movie businesses. Sony rejected the spinoff idea, but under pressure from Loeb it cut thousands of jobs at its entertainment, TV and PC units. Loeb sold his shares at a profit of almost 20% the following year.

Around the same time that Loeb was taking on Sony, Abe's government went to work on reforms to revitalize Japanese business and help pull the country out of deflation. His government's "stewardship code," passed in 2014, is designed to give investors a greater voice, while the 2015 "corporate governance code" is meant to encourage Japanese companies to appoint independent directors, become more transparent and raise return on equity.

Samsung Electronics shareholders attend the annual general meeting in Seoul, in March of this year. Elliott Management narrowly lost a bid to block a merger between two Samsung affiliates in 2015, leading to a government corruption inquiry and the jailing of then-President Park Geun-hye.   © Reuters

In 2013, Abe went to the New York Stock Exchange and gave a speech in which he implored investors to "buy my Abenomics." The message was hard to miss -- and some foreign investors accepted the prime minister's invitation. "We got more involved in the Japanese market after Abenomics," said Aaron Stern, managing director and partner at Fir Tree Partners, a U.S. activist fund that owns a 5% stake in Kyushu Railway, which operates major railways in western Japan.

The reforms in Japan were so influential that most emerging countries in Asia have now adopted similar codes, which in turn has prompted more activists to buy into the market.

Like Japan, South Korea is seen to be a target-rich country for activist investors. Business is dominated by chaebol, sprawling family-run conglomerates that have been criticized for poor governance and disclosure practices.

Elliott Management has tussled with South Korean companies over the past five years. The company came out in opposition to an opaque group restructuring plan by Samsung group companies, and pressured Hyundai Motor to enhance capital efficiency through share buybacks.

But it is no longer outsiders like Singer who are taking on corporate Korea. Kang Sung-boo, a former finance executive at a unit of Shinhan Financial Group and a Daewoo group company, decided to become a rare "homegrown" activist, in 2018 setting up the fund Korea Corporate Governance Improvement. Kang has never studied or worked outside his home country.

He has quickly captured the attention of South Korean business by taking on Hanjin-KAL, the holding company of Korean Air Lines. In a sharply worded letter in January, he attacked Hanjin's "poor corporate governance, represented by embezzlement and tyrannical behavior, the arrogant and bossy attitude of the controlling [Cho Yang-ho] shareholder family, excessive debt ratio resulting from unreasonable subsidies to affiliates, the possession of unnecessary idle assets, and lax management."

Cho Hyun-ah, center, is questioned by reporters in Seoul in 2018: A member of the family with a controlling stake in Korean Air Lines, Cho's 2014 tantrum over nuts, which delayed a flight, fueled public distrust toward chaebol.   © AP

KCGI amassed a stake of around 12% to become Hanjin-KAL's second-biggest shareholder, then led an attempt to unseat a director close to the conglomerate's controversial chairman, who was ousted from Korean Air Lines after being indicted for embezzling corporate funds.

But Hanjin resisted the fund's pressure, re-electing chief executive Suk Tae-Soo as a board director and picking up three new outside directors, all of whom had been opposed by KCGI.

After the defeat, Shin Min-seok, vice president at KCGI, said the company would keep pressing Hanjin. " We will continue to exercise our duties and rights diligently as a shareholder," he said.

Still, shareholder activists in Korea are sailing with the wind. "We've gone over the threshold. This is the symbolic message of activists," said Lee Wonil, founder of South Korea-based Zebra Investment Management.

A further tailwind comes in the form of President Moon Jae-in, who has taken a strict stance on chaebol. In an effort to weaken their influence, Moon has added pressure to change the complex capital structure within group companies known as "circular shareholdings." As a result, the total number of such holdings has fallen sharply from about 450 in 2015 to fewer than 10 in 2018. The groups have also been steadily simplifying their business structures, allowing room for activists to jump in with strategic proposals such as asset sales.

For real this time?

The most common criticism of activist investors is that they promote excessive "short-termism" at the expense of long-term value creation. Such thinking seems anathema to the traditional way of business in Asia, where companies are meant to be run for all stakeholders' benefit for the long term.

"It is important to keep the balance between [being too short and too long]," said Shu-Lin Lu of the Securities and Futures Investors Protection Center in Taiwan.

"As economies become mature in Asia, there must be more room for activist shareholders to play [a role]," said Zebra Investment's Lee. "They are indispensable to good corporate governance, which encourages companies to move for more profitable business."

Despite the upswing in activist campaigns in Asia, there are still doubts about whether the movement will take off as it has in the U.S. and Europe. Perhaps nowhere is the skepticism greater than in Asia's original activist target: Japan.

In March, Credit Suisse sponsored an investor panel about the possibility of dramatic change in governance in Japan. In the title: "This time, is it for real?"

Fischer was not the only optimist in the room. But there were also some investors who said they had given up on the country.

"I am completely disappointed with Japan over many, many years," said a man from the audience, after hearing generally upbeat comments from Fischer and the other panelists. "We see at least a little bit of higher dividends, but [there are] still extremely lazy balance sheets [and they] just don't produce the returns that we expect as investors."

Hideki Kanda, a law professor at Gakushuin University and an adviser to the Tokyo Stock Exchange, acknowledged the investor's pain. But he countered with a sentiment that Fischer and his fellow Japan activists could certainly appreciate.

"I am disappointed, too," Kanda said. "But I think disappointment is an opportunity."

Nikkei Asian Review chief business news correspondent Kenji Kawase in Hong Kong and Nikkei staff writer Kim Jaewon in Seoul contributed to this report.

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