Dramatic Board Feud Turns Quiet Investor Into Activist in Japan

(Bloomberg) -- Masanaga Kono was so worried about Lixil Group Corp. abruptly removing its chief executive officer that he went to the firm’s Tokyo office to work out what was going on.

The analyst, whose employer Marathon Asset Management had been an investor in Lixil and one of the toilet maker’s predecessors for 16 years, was in for a surprise. He found himself siding with Kinya Seto, the ousted boss, after hearing his version of events, and spearheading a campaign to remove Seto’s replacement.

And so began one of Japan’s most public, and most peculiar, corporate governance battles since Prime Minister Shinzo Abe made shareholder-executive relationships a big focus of his administration. It’s unusual because neither Kono nor Marathon consider themselves activist investors, the standard protagonists in these fights. It’s also notable because Marathon’s campaign ultimately led to the removal of the company’s leader, meaning Lixil could be about to have its third CEO in less than a year when shareholders meet on Tuesday.

“This kind of action is abnormal for us,” Kono said in an interview in Tokyo. “The decision that was made was just so murky,” he said. And “as a shareholder, it’s not something you can just let pass.”

Seeking Answers

As Kono tells it, he went to visit Lixil after emails to the company about the reasons for Seto’s resignation, which was suddenly announced in October, failed to yield convincing answers. When he was there talking with management, Seto approached him and told him he’d been misled into stepping down by Yoichiro Ushioda, the longtime chairman of the company who took over from Seto as CEO.

In Seto’s account of what happened, Ushioda told him everyone on the company’s nomination committee wanted Seto to step down, so Seto acquiesced. At the same time, Ushioda told the nomination committee that a successor was needed because Seto had expressed his intention to resign.

Ushioda disputes that, saying Seto informed him that he was willing to step down if Ushioda wanted to take his place.

Both men were also in disagreement over how to manage the company, at the center of which stood an Italian subsidiary that Lixil acquired in 2011. The unit had been loss-making, which Ushioda said in an April interview was due to Seto. But Seto was of the view the business should have been sold, which he had tried to do, only to be blocked by the U.S. government.

‘Troubling’ Process

On hearing the arguments, Marathon’s Kono became convinced the process to change the leadership was “troubling.” Working together with a group of other shareholders, Marathon called in March for the company to hold an extraordinary general meeting to remove the new CEO Ushioda and Hirokazu Yamanashi, the chief operating officer. Platinum Asset Management, another Lixil stakeholder, later echoed the group’s call.

In a surprising reversal in April, Ushioda and Yamanashi yielded to the pressure and announced they would resign as directors.

While that was a major victory for the shareholder group, investors in the company have seen the stock drop more than 16% since Seto’s removal at the end of October.

And the spat hasn’t ended. Seto decided to put forward a slate of director candidates, including himself, for the company’s annual general meeting. Lixil proposed a group of candidates that represent a complete overhaul of its board. All but one are outsiders and two come from Seto’s slate.

Seto says the company’s proposed board is “unrealistic” because it has so many outside candidates, while Lixil says it’s making efforts to gain the understanding of shareholders about its proposal.

Continuing Hostility

Marathon opposes Lixil’s candidates, saying the company’s "hostility" toward its shareholders has "seemingly continued” because investors’ views weren’t reflected in the company’s proposed slate. Institutional Shareholder Services Inc., the influential proxy adviser, is recommending backing some names from each slate. When shareholders vote, they could elect a mix of candidates, potentially prolonging the feud.

Taiyo Pacific Partners, which specializes in Japan investment, joined Marathon in calling for Ushioda and Yamanashi’s removal. The U.S. fund was worried the situation would hurt the reputation of all Japanese companies, according to Brian Heywood, Taiyo’s chief investment officer and founding partner. It was a first for Taiyo, he said.

Broader Implications

“I don’t like to be in the headlines,” he said. But the way Ushioda replaced Seto “wasn’t good for the company. It wasn’t good for Japan.”

Heywood is choosing to take a positive view. He says that while it’s impossible to know what the “real truth” is, “something wasn’t right” and, thanks to shareholders, it has been addressed. Investors can choose from a broad swath of candidates at the AGM, all of whom are there through transparent procedures.

“The way to do it is to have a clean” process, he said. “You put this out there, you get the nominees, and you get shareholders to vote on them. That’s a good process.”

--With assistance from Sarah Wells.

To contact the reporters on this story: Min Jeong Lee in Tokyo at mlee754@bloomberg.net;Grace Huang in Tokyo at xhuang66@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Tom Redmond, Jeff Sutherland

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