Consensus be Damned
In 2001, strategic investor Warren Lichtenstein created Steel Partners Ltd.'s Japan Strategic Fund LP, a joint venture with Boston-based Liberty Square Asset Management LP.
At the time, most Japanese corporate executives had never heard of Lichtenstein and "investor insurrections were virtually nonexistent there." Unlike in the United States, Japanese companies have a long tradition of promoting their own vice presidents and other "company men" to directorships, all the while opposing outside influences of any kind.
"Japan is a very stratified, hierarchical society, and the concept of independent directors on boards is not prevalent there," says Barry Genkin, partner and activist consultant at Blank Rome LLP. "There is a premium placed on seniority in Japan, and not many people question the way management runs companies, which fosters lax governance."
Another unpleasant novelty for Japanese companies: pressure to use cash on hand for special dividends or stock buybacks.
"In the U.S. this is prudent management, but stock buybacks and special dividends are still not that common in Japan," Genkin says.
"With cross-sharing agreements, these companies each buy shares at each other's companies, and they tend not to act as independent shareholders because they automatically rubber-stamp support for management," says Genkin. "We may find it offensive from a governance perspective in the U.S. in a post Sarbanes-Oxley world, but that's the way it is."
Despite the inherent complications, more foreign investors are making forays into the Japanese market than ever before. About 30% of the Tokyo Stock Exchange's daily volume of trades is made by non-Japanese investors including investment funds backed by Western public pension funds. Steel Partners' victory at Aderans has some Western observers expecting more activist plays in Japan. "Other activists are going to find Japan to be fertile ground," Genkin says. "Everyone knew that when you do the comparison between Japan and U.S. companies, there are many more significantly undervalued companies in Japan, but this shows that there is a way of getting in there and making money."
But even though activists may have difficulty with dividends, their insurgencies are making inroads. "The Japanese would love for this phenomenon not to exist, and they would be very happy not dealing with it, but through Steel Partners, TCI and others, the same thing that's happening in the U.S. is happening in Japan," Genkin says. "You can reach the conclusion that the culture and philosophy is different and less inclusive in Japan, but if you look at the empirical evidence of how their stocks are undervalued, they're sitting ducks for somebody to come in and upset the apple cart."
"Consensus be Damned," by Ron Orol first appeared in The Deal Magazine on June 13, 2008. To learn more about The Deal Magazine, please visit www.thedeal.com.