Activists’ interests may, however, not necessarily be aligned with investors’ long-term interests, and, by extension, clients’ interests. Industry studies suggest the average holding period of an activist investor is just four to six quarters, and the intrusive ways demands are made can be a source of distraction and, at times, even embarrassment for the board, which can ultimately be to the detriment of the company.
Against this backdrop, we believe it is our fiduciary duty to help companies get in better shape before an activist shows up and forces them to. In collaboration with Wellington’s ESG team, our Japan equity team has consistently done this by 1) building long-term relationships with companies and pushing for board access, which allows us to support and advise companies; 2) clearly communicating our voting guidelines and rationale specific to Japan every year via outreach letters heading into proxy season; 3) increasing our willingness to vote against management on a particular resolution; and 4) providing recommendations formally to the board via board letters if deemed necessary.
One such example is a Japanese machinery company, which has operationally underperformed regional peers despite being the technology and market-share leader in its core business. The company was also below book value, with excess cash on its balance sheet. We believed, based on our experience and numerous global case studies, that these were traits that could potentially attract activists.
Early in 2023, our ESG team, working alongside our Japan equity team and a Wellington global industry analyst (GIA), engaged with the company to recommend further preemptive defenses such as 1) board refreshments, since its more-than-a-decade board tenure far exceeded the five-year average tenure at TOPIX 100 companies; 2) more independence in subcommittees in response to an outsized family representation; and 3) for noncore business to be reassessed. This engagement was, in fact, a continuation of our longer-term value creation engagement effort with the company, which has contributed to their improved board independence, adoption of restricted stock plan for directors, and increased buyback.
Japan equity: Reason to believe
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Toshiki Izumi, CFA, CMA