Interview with Mr. Tsuyoshi Maruki

An in-depth interview with Mr. Tsuyoshi Maruki, who  established Strategic Capital, Inc. in September 2012, was one of the Founding Partners of M&A Consulting (Japan’s first activist fund), and once worked “on loan” at METI (when it was known as “MITI”).

”How are Japanese companies becoming better stewards of capital? Improving corporate governance”

Japanese corporate profits are way up, even if real GDP is not.

”If you were to use just one measure, such as real GDP, to assess how Prime Minister Shinzo Abe was performing, you would conclude his policies are clearly not working: real GDP itself is flat to slightly negative since he took office.

On the other hand, if you look at the aggregate operating profit of Tokyo Stock Exchange Price index constituents as a reflection of corporate profits, it has grown more than 60% since he took office.

Discussion Paper by Hideaki Miyajima et al : ”Does Ownership Really Matter?: The Role of Foreign Investors in Corporate Governance in Japan”

”Abstract. After the banking crisis of 1997, corporate ownership in Japan shifted from an insider-dominated to an outsider-dominated structure. This paper analyzes the impact of dramatic changes in the ownership structure on corporate governance and firm value, focusing on the role of foreign institutional investors. There are two competing views on the role of increased foreign ownership. The positive view is that foreign investors have had high monitoring capability, and encourage improvements in the governance arrangement of firms, resulting in higher performance.

Financial Times: ”String of scandals puts Japanese investors on edge”

The FT comments on what seems to be a string of scandals in Japan.  It is our opinion that such governance or compliance issues are not necessarily more frequent than in other developed nations – it is difficult to compare – , but (1) they arise from different gaps in governance and management structures; and (2) whistle-blowing is becoming more frequent in Japan.

”From carmakers and electronics groups to housebuilders and the constructors of the nation’s roads and runways, a government-led transparency drive has accelerated a record surge of accounting and data fraud scandals across corporate Japan.

Paula Loop & Paul Denicola: ”Investors and Board Composition”

”In today’s business environment, companies face numerous challenges that can impact success—from emerging technologies to changing regulatory requirements and cybersecurity concerns. As a result, the expertise, experience, and diversity of perspective in the boardroom play a more critical role than ever in ensuring effective oversight. At the same time, many investors and other stakeholders are seeking influence on board composition. They want more information about a company’s director nominees. They also want to know that boards and their nominating and governance committees are appropriately considering director tenure, board diversity and the results of board self-evaluations when making director nominations. All of this is occurring within an environment of aggressive shareholder activism, in which board composition often becomes a central focus………”

Citywire: ”Japanese value is not dependent on a weak yen”

”The Japanese equity market has been under pressure recently from a strengthening currency, a weakening global economy and the uncertainty caused by the Bank of Japan’s introduction in late January of a negative interest rate policy. We recognise these concerns, but think that the fears of many market participants are overdone.

As value investors we still see Japan as a fertile hunting ground.

A far greater percentage of listed companies have net cash on their balance sheets in Japan than in any other major market and net cash represents a greater percentage of market capitalisation, as shown below. Furthermore, many of those companies have significant unrealised gains on real estate holdings; and many have large holdings of listed equities, some for strategic business purposes, but some for no reason other than historic relationships.

The question that has occupied the minds of value investors like us has been how that value can be unlocked, used more efficiently and returned to investors when not needed for operational purposes. In that regard, we think that 2015 was a pivotal year for listed Japanese companies.

Research Report by Kohei Soga ”Scale of ESG investment in Japan”

‘Summary: This paper will introduce the overview of the results of a questionnaire survey of Japanese domestic investment managers that have signed the United Nations Principles for Responsible Investment (UNPRI) conducted by Nikko Research Center , for the purpose of clarifying the state of environmental, social, and government (ESG) investment in Japan. Until now, ESG investment market research has focused on investment products designed for individual investors and the state of investments including those by institutional investors was never fully understood. From the results of this survey, we learned that ESG investment assets in Japan amount to 46.0 trillion yen, which is an amount that greatly exceeds the scale of individual investor-focused financial products known up until now. In addition, among the ESG investment approaches , the engagement/proxy voting was dominant. After examining the personnel structure related to ESG investment institutions, it was revealed that many institutions have the most personnel devoted to proxy voting operations. Furthermore, an examination into the characteristics of the clientele revealed that institutional investors such as pension funds are the main players in Japanese ESG investment.

Discussion Paper by Miyajima & Ogawa: ”Convergence or Emerging Diversity? Understanding the impact of foreign investors on corporate governance in Japan”

”Abstract: The increasing share of foreign institutional investors has been a global phenomenon for the past few decades. Corporate ownership in Japan shifted from an insider‐dominated to outsider‐dominated structure after the banking crisis of 1997. On the role of increasing foreign ownership and its consequences, there are two competing views. The first view, or convergence view, is that foreign investors have high monitoring capability, and encourage improvements in the governance arrangements of firms, resulting in higher performance. Conversely, the skeptical view insists that they have a strong bias in their investment strategies and are less committed to a firm. Even though a correlation between foreign ownership and corporate polices and high performance could be observed, it could be superficial. Higher stock returns can be induced by their order demand, while performance can simply reflect foreign investors’ preference for high quality firms. To answer which view is more persuasive, this paper analyzes the impact of dramatic changes in the ownership structure on corporate governance, corporate policies, and firm value, with a focus on the role of foreign investors, particularly in Japan…………..”

Bloomberg: ”This Japanese Activist Investor Doesn’t Have Time for Your Nice Meetings”

Not Maruki. Where persuasion doesn’t work, he turns to techniques that include banding with other investors to oust management and filing lawsuits to overhaul corporate practices in order to boost returns for his 9.7 billion yen ($90 million) fund.

“If one always adopts a friendly engagement style, such as having gentle and warm meetings, would the management really change?” said Maruki, 56, who founded Tokyo-based Strategic Capital Inc. in 2012. “After the meeting, it would probably end at a comment like, ‘They were nice.’”