Shareholder Detective Helps Firms Fight Activists in Japan

(Bloomberg) -- Prime Minister Shinzo Abe has spent almost seven years trying to improve how companies in Japan’s more than $6 trillion stock market are managed. One of the biggest winners from his corporate governance push? A firm that often helps executives defend against it.

IR Japan Holdings Ltd. is a detective of the shareholder register, using techniques developed over decades to find out the true owners of a company’s shares, which are often hidden behind custodians. The little-known consultant then advises management on how to handle dissident stock holders and ensure they aren’t defeated in shareholder votes.

Abe has been calling for the replacement of traditionally friendly shareholders with investors who will urge executives to run their companies better. As this emboldens activists and others to demand more from firms, Japan Inc. has sought ways to protect itself, including turning to the services of IR Japan, which was founded in 1984 and is itself a listed company with a market value of about 75.8 billion yen ($698 million) as of Tuesday.

The Tokyo-based firm’s profit has jumped since it listed in 2015, while its shares have surged more than 11-fold. They’ve more than tripled this year alone, the best performance on the Tokyo Stock Exchange’s main board, and rose as much as 4.6% on Wednesday.

“Our business model is something no other company can copy,” said Yusuke Sasaki, a manager at IR Japan’s corporate planning unit. “That’s what’s being appreciated.”

Finding out who’s really on the shareholder register is increasingly important for listed firms, but it’s no easy task. IR Japan says 30% of what it does is scour publicly available information such as company and investor filings.

The remaining 70% is where IR Japan’s expertise comes in. It has gathered data on asset managers and other investors for more than 20 years, and also information on how shareholder lists have changed. Through that, it figures out much of the picture. To fill the remaining gaps, a group of internal researchers calls investors to ask them about their holdings.

“We’re the only company that has intelligence on who exercises voting rights based on the shareholder list,” Sasaki said. “It’s information that’s not available elsewhere.”

Governance Overhaul

Since Abe returned to power in 2012, his government has instituted a stewardship code for investors and a corporate governance code for companies, aiming to move away from a situation where shareholders blindly supported incumbent management regardless of their performance.

One result has been an increase in activist campaigns at the nation’s firms. Shareholders made proposals at the annual general meetings of 54 companies in June, the most on record and up by 14 compared to the previous year, according to IR Japan data.

Another consequence has been more votes against management at shareholder meetings, on matters such as directors’ re-election. Almost 15% of companies that held AGMs in June had a proposal with a disapproval rating of more than 20%, also an all-time high, according to IR Japan.

And so-called cross-shareholdings, owned by friendly companies that generally support incumbent management, have decreased to 10.1% of the market from 34.1% in 1990, according to Nomura Institute of Capital Markets Research.

IR Japan provides forecasts of shareholder vote outcomes based on its analysis of shareholder lists. Then it helps companies decide what strategies to take before and after votes.

While IR Japan declined to comment on individual clients, there have been several high-profile activist campaigns in the last two years where this information matters.

Shareholder Campaigns

In one example, a group of dissident shareholders pushed out Lixil Group Corp.’s chief executive officer earlier in 2019, citing shortcomings in corporate governance.

In another, Hong Kong hedge fund Oasis Management Co. failed last year to block the merger of Alps Electric Co. and Alpine Electronics Inc.

And more recently, a takeover battle has been playing out at Unizo Holdings Co., with Elliott Management Corp. calling on the developer to make an effort to accept an offer from Blackstone Group Inc.

IR Japan “continues to be in spotlight,” said Tomoichiro Kubota, an analyst at Matsui Securities Co. “Earnings have been showing significant growth.”

IR Japan’s operating profit for the six months ended September climbed 71% from a year earlier to 1.5 billion yen, the company reported last month. Net income rose 68% during the same period.

The stock has surged 254% in 2019 through Tuesday’s close, the biggest gain among 2,148 companies in the benchmark Topix index. It was up 1,041% from listing in February 2015 through Tuesday.

The company started out helping listed firms to prepare for investor relations meetings, providing simple services such as translating presentation materials into English. In 1997, IR Japan expanded into shareholder relations and analysis of shareholder registers. It now has more than 600 companies as clients, it says.

Shirou Terashita, the president and CEO, owns about 51% of IR Japan’s stock, a stake that was worth about $356 million as of Tuesday’s close.

The share surge has sent valuations soaring. IR Japan trades at 48.4 times estimated forward earnings, compared with an average of 13.6 times for companies in the Topix.

To Mitsushige Akino of Ichiyoshi Asset Management Co., that level isn’t justified. Or at least, he doesn’t see room for further gains.

“It’s unreasonable” to expect the rally to continue, he said. “The stock has already priced in growth relating to its shareholder relations business.”

©2019 Bloomberg L.P.