You're listening to Asia Centric from Bloomberg Intelligence, the podcast that pulls back the curtain on global business so you can invest better across the Asia Pacific rim. I'm John Lee in Hong Kong. Shareholder activism is gaining traction in Japan. The number of new activist campaigns surged seventy percent year on year to over one hundred in the first half of this year, marking the biggest increase out of any
major market in the world. Meanwhile, a number of new, homegrown activist funds are becoming more prominent in Japan's corporate circles. What's driving the growth in shareholder activism in Japan? Is Japanese corporate culture finally changing? And how do Japan's new activist funds differ from their famous US counterparts? By Elliott
Advisors and Bill Ackman. Here to discuss Japan's push for corporate governance and shareholder activism is Shuhei for Kawa, Managing director and portfolio manager at Misaki Capitol, and James Hahn, managing partner at Prodigies Group focused on local activism. Welcome Shoehy and James Hi.
John, I'm great to be here.
Thanks for having.
US shoe Hey, I wanted to ask, are we in a golden period of shareholder activism in Japan?
Yeah?
I think this is one of the start points of the golden period of shareholder activists in Japan. The US experienced the same things in the late nineteen eighties, and I believe this is just a start compared to the US now, Jeffan's average portion of the low pbo vo one company is about fifty percent. Same things happen in the US in the ninety eighties. There are some structure change in the US. It takes twenty years or thirty years to change the corporate god in one country, and
they are compared to the US. I think Japan is just a start point of a reform of a corporate governance, and the develotop of the change of corporate governance in the decent years is a huge I think this is still slow, but this is a good timing to entry to this market.
And James, you've been working in the Japan activist scene for quite a number of years, over a decade. What's been the major driving force of the rise of shareholder activism in Japan? Has it been the corporate governance code or did it start before then?
I think the simple answer is it's definitely been government policy led the introduction of the Corporate Governance Code.
The stewardship codes. These are all.
Sticks and carrots introduced by the government in the FSA. I mean, there are other environmental regions behind us, but I mean it's definitely it's been a government led process.
So, and it's been around for quite a while, okay.
And when the public thinks of shareholder activism, they often think of the US activists, the famous ones like kark On, Bill Ackman, Elliott Advisors, which is actually taking on one of the Japan's biggest corporate soft bank. They often attack corporate boards, sometimes they attack governments. How are japan local activist funds different from say, these famous US activists.
I think whether the approach is Hohl foundational or constructive is not nedated to the nationality. It's the matter with the fund staff. However, as a local activist fund, we understand how the unique culture of a Japanese company influences their digital make it so the strength of local activist fund lies and diabeity to emphasize what the management is struggling with and why they may not be making a light Jim.
And James, did you want to on that as well.
Yeah, two comments.
The first is that the one way that the locals are different is they tend to be more constructive.
You know, carrots rather than sticks. And if you look.
At the now what twelve years or so history of this sort of development, a lot of people don't realize is that a lot of the engagement carrot driven approach, it's actually had a better track record, at least in the first half.
And I think that's something that's kind of people overlook.
I mean, I think the second thing is that I think a lot of people don't realize this, but now Japan is the second most active in terms of industor proposals in the world.
I mean, careas number three. Everyone knows us is number one, but I mean there's quite a lot of activity here.
And you mentioned the carrot approach for local activist funds. Do you feel that, you know, Japanese corporate boards are more receptive to local activists such as yourself versus the Globe blacktivists.
I believed the company I'm more willing to accept the activists who take a construct approach, and that in case of Misaki, they're even inbound a query from the company, meaning that the company came to Misaki and ask investment a device.
Okay, so companies are now approaching you to improve the corporate strategy and the shareholder return strategy.
Yeah, we are.
Often asked to make our presentation at the board medium in Japan, the CEO often has an opportunity to meet with the investor and the field pressure, but other board member may not share this, So SHEO want to use the voice of shareholder to push his default in the board.
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For over a decade.
When you first got to Japan, what was the corporate culture and how much has it changed from now?
You know, I think the commentary that I used to hear is yeah, there certainly is change, but it's just happening so slow in Japan that that's been the frustration of a lot of Western industors. I think that that narrative has changed in the last few years. It's not a question of if, it's a question of how it's changing. I mean, if you look at the number of local activists, it was just a handful about maybe four or five
about a decade or twelve years ago. Now antadotally we're hearing sort of like fifty sixty.
That's a big increase in terms of number of asset managers.
As shoe A just mentioned, the amount sheer amount of inbounds that he's getting, you know, instead of him knocking on the doors of these Japanese corporates. It's pretty stunning. I mean, I think the bigger issue is not so much these inbounds. You know, guys like Chouei, they have this unique interaction with the corporates. I think what's really important is how Shue is allocating his time. Because he has such a great relationship, he has to monetize that in terms of ROI and.
How much time I spend with his company.
You know, at the end of the day, we are investors here, right and we're not just crusaders, and that's probably the big change with a lot of these engagement managers.
And James Hono, you used to work on Wall Street for many years, used to work at a hedge fund in New York City before you moved to Japan. How would you describe a Japan's local activist industry?
Like?
Are we still in the early stages? So we may be, is it mature?
Give us some examples.
I think if you use a really blunt metric like, for instance, number of external board directors, right, and use a US baseball analogy of how many external board directors you have in Japan compared to the rest of the world, I mean you could say sort of Japan's in the maybe fourth inna Europe and maybe other places.
In Hong Kong elsewhere, maybe it's sort of in the fifth or.
Sixth inning and the US with you know here number of external board directors. I mean, there's other metrics, but that indicates that there's a lot more to go. Another metric is if you look at valuations priced the book versus roe, we're still well behind that, you know, in Europe and the US, and so we're definitely the earlier
stages there. I think the final thing that I'll say though, is if you look, however, at what the activists will do, and most international activists will focus on capital Mana has the balance sheet and the academic research that Misaki had done that sort of played out. You're starting to see a lot of crowded traits where activists are kind of running into each other in their portfolio. You don't see that with Misaki. I think Tsaki's view is there's a
bigger story going on here. I think the story that people think about is, well, this is sort of played out and am I too late? And I think the bigger story is the area that Misaki is focused on. This is a much much bigger part of the market, and they're not seeing any sort of budding heads with other managers in that space. You know, a lot of people don't realize this, but there are more small midcaps listed in Japan than even in the US. There's just
such a huge part of the market. People don't realize.
That, and it's quite well known that a lot of the MidCap space in Japan is really under research.
They don't have broke re coverage. Is that correct?
Yeah, that's correct. Yeah, eight hundred listed is stuck in Japan. Five hundred or six hundred names are covered by analysis.
Okay, so if you roll up your sleeves and do some fundamental analysis, you can find a lot of opportunities.
You're saying, Yeah, I think so.
And the most of the company are undervalued because of they are now coverage by analysis. So yeah, they're a huge upside for ir impillment as well.
That's quite interesting because in the last couple of years, the NICKET two to five, you know, before the recent correction, has been one of the best performing indices around the world. It receives a lot of foreign investment. So you're basically saying the story is that a lot of foreigns were just looking at that large cap space and not in the mid caps.
Yeah, but I think this is huguely due to the week am.
So we can contribute the profits of a large cab company because they have a huge exporter to the foreign businesses.
Okay, and the James look, I see you as a bridge between the local activists as well as like a lot of global investors. What if far investors often get wrong about Japan.
I think that what they used to get right. Is the culture of equity, the structural changes it was is coming at such incremental stages that they always saw this as a trading market.
There's no structural multi year opportunity.
I think that's changed.
I think to your earlier question about the blue chip names that are focused by most international investors, that's done very well because of this now change in mindset. And I think that with the crash in the currency in Japan, yeah, it's been the large corporates that have really benefited. So all together, blue chips have done really well in Japan. I think while that's important, again, it's actually the small medium size segment that's a much bigger part of the market.
And if you look at the last few Michaels when we had a bear market, I think this is something that a lot of people get wrong, is when you have a bear market, most small midcaps in Asia, they just get slaughtered, you know, irrespective it's just a beta trade.
Japan is different. You can see some amazing share price dispersion with small midcaps in Japan in a bear market, which you don't see in Asia ex Japan, and I think it's a little bit like GMO in the Boston, they were making the comment that small mid caps sort of island of value in a crazy insane valuations. I think it's an interesting area that they're definitely getting that wrong.
In Suwae, did you want to add more to them?
Oh?
Yeah.
In that country than Japan, it is assumed that the bothom that effort, the CEO has a physiciality to the chef order. On the other hand, in Japanese company, it is common that someone who have grown within the company, often selected as CEO and CEO tell us them more care about the carriage and the employee shareholder, and they may not necessarily feel the fetish idity toward the shareholder. So it is the timing for activists to change the company management through the hot fire approach.
Yeah, I did. This is a most different aspect in Japanese market.
Okay.
And at the beginning of our discussion, James, you mentioned that a major feature of Japan's push for shareholder activism has been the corporate governance Code has been the government led policies. Can you basically summarize what the corporate governance code is for? You know, some of the listeners who are not experts on Japan.
If I were to oversimplify, Essentially, it's uh, sticks and carrots for minority shareholders in these listed companies because Japan is treating this Japan discount, the price of the book is so much cheaper. You know, one big reason is because minority shareholders their interests.
Are not aligned.
And I think that whether you have policy changes that encourage us, let's say, greater dividends or greater focus on roe or sticks that kind of give these activist managers more sticks or other minority shareholders to raise their voice for change. Certainly a lot of these sticks, for instance, you could not really use a lot of these sticks in the early stages of this evolution, and I think that's why the activists they actually did not do very
well in the first half. But that's changed quite a bit, and now the narrative is sort of what part of the market small MidCap engagement versus activism. But you know, it's essentially it addresses this Japan discount. And as we you and I John, we are both in Asia during the ancient financial crisis. Essentially the problem of any financial crisis is the inefficient allocation of credit, right, you know, loans or money going into low Roe or ro I
c type businesses and that's what kept Japan down. Then hopefully this is what's going to create some improvements.
And sure, I have to ask Japan it is changing, but what's the pace is it? Are we seeing a big revolution or do you think this is more of a slow evolution in terms of corporate culture, corporates acting in the best interest of shareholders, female board representation, just describe the pace of change.
I think this is very slow movements.
And I think the more the corporate executive open to the data with sharp order, but still the most of the company I know, I think the management don't want the data with the activists indeed.
Okay, so Japan's changing, but it's still at a more of an evolution than a revolution.
Yeah, and that this is for Japanese activists market, so their future potential for improving their management and enhancing their corporate value.
And James, look, some other Asian countries are looking at Japan's corporate governance code. They've seen the success of how it's brought in a lot of global investors and they're trying to replicate it. Now I'm talking about Korea and also China.
What's your take. Do you think these.
Countries can replicate Japan's success?
I mean absolutely, and I think that the starting point obviously is the low price to book valuations and the low ROS related to that. But I think there are two key elements here. I think one is the most important. As I mentioned before, the changes have been driven by the government in Japan policy, you know, the stewardship and corporate governance codes. I'm aware of the copying.
And pasting by the FSA.
Odes here and you know, bringing that over to Korea, you know, and they adjusted it accordingly in Korea. But there has been that trend from Japan elsewhere, you know, places like Korea. But I think there's another element here, and that is one kind of common feature of the terrible corporate governance is related to inherence tax. Japan and Korea, for instance, you know, one of the highest inherence tax in the world. I think this in particular is a bigger issue in Korea.
Though, and the reason is that you look at the listed companies in Korea, there's a lot more family.
Owned business there than Japan. And on top of that, the inheritance tax rate is even higher in Korea than Japan. What that basically means is that this is even a bigger issue in Korea. And I think that it's a bigger wall for activists to use sticks because if it's a family owned businesses, they have a much bigger stake in the companies. And so if you're going to fight with activists, different kind of fight than in Japan. On the other hand, if somebody can kind of solve this issue and.
Work around us.
And I think one last comment to make is that one difference in other places like Korea, though, is even if the government did a U turn and said just kidding, we're not really serious about this, corporate governance changed. The fact is is that a lot of the owners of these corporates in Korea, they're actually dying out post Korean War with similar histories, and so it's creating this opportunity right now. Even if the government did a U turn, there will be change.
And James, before I let you co, you and I had a discussion. Now when you move from Wall Street to Japan. You mentioned the extremely low number of asset managers in Japan. Can you just tell the listener like your experience moving over from Wall Street to Tokyo.
Yeah, I remember I was invited to a conference in Tokyo. This was maybe just roughly maybe about seven years ago or so. I think it was jiam. It was a government body to promote the asset manager and finance industry in Japan, and they had invited some big global institution on LP investors and to ask questions how do we promote the financial industry in Japan?
And I was kind of stunned.
I was thinking, like, wow, and these are big global institution and LP investors. Why are you going all the way to Japan to try to help these guys. I wanted to understand what the context, you know, what is this event? And they were saying to me that they're looking for more allocations to Japan, but they just could
not find enough japan asset managers. And the numbers ancdotally that they had told me was if you take out the bally Asthnes the millennium, these sort of like platforms that basically take a lot of people single managers or ex prop desk people in terms of just standalone ACID management firms, in terms of local managers that they can
interact with on an institutional level. The numbers that they told me were something like forty or so in the whole country, and you could find that many number of managers, maybe find two hundred and three hundred in places like Korea, or much bigger number in Hong Kong, Singapore. You could find that many number on one street in New York City, and that was the case about six seven years ago. I think we've seen a huge increase in terms of
number of managers. But as Shoe mentioned, for example, this small MidCap space, there's just so many and they're just not enough managers to look at this space. So it's a pretty unusual situation in Japan.
Well, so entrepreneurism is returning back to Japan. It's been an intriguing discussion on Japan. It's pushed for corporate governance reforms and the rise of local shareholder activism. Thanks for joining the shows, Shoeheye and.
James, Thank you for me, Thank you for having us.
This podcast was produced by Clara Chan and you've been listening to the Asia Centric podcast