IN-DEPTH: Q&A with Strategic Capital
An interview with Tsuyoshi Maruki, founder and CEO of Tokyo-based activist fund Strategic Capital, Inc.
Given Japan’s increased focus on corporate governance and shareholder activism, has it become easier to work with management teams?
The former president of Japan Exchange Group (JPX) put it well in a media interview when he commented that there'sbasically a bifurcation in the market right now. In general, management teams of Japanese companies have been responding and changing. But we intentionally choose to invest in companies with bad governance, where management is not responding and does not accept or agree with our proposals. So, for us, it's just as hard as it's always been.
What led you to nominate six directors at clothing company Daidoh, the biggest slate you have ever fielded?
We have been investing in Daidoh for about a year and a half and we have explained and proposed to them various issues to improve governance. But we were disappointed at the end of last year at the behavior of its president and the other directors. So, we decided to accumulate more shares at the end of last year and then at the end of March, and we now have 32.2%.
One of our candidates is Toshihiko Nakayama, who was chief financial officer at Books Brothers Japan, who we hope will be a full-time director at Daidoh. The other five candidates would be first-time directors, but all of them have experience of management.
Given you have a 30% stake, are you confident that the campaign will prove successful?
We are not sure, but current President Tsukasa Nabewari received less than 80% (76.1%) support at the 2023 annual meeting. We don't know what will happen, but we got the shareholders list as at the end of March and we are now analyzing that and approaching other large shareholders to explain the issue. There are many individual investors in Daidoh, so it's important to communicate with them.
Strategic Capital has also asked Osaka Steel to develop and disclose a plan to reduce greenhouse gas emissions. Is this the first time you’ve taken such an environmental-focused approach in a campaign?
We've talked to a couple of companies about these issues in the past, but this is our first formal one. We're always thinking whether it'san appropriate issue and for Osaka Steel, the electric furnaces which they operate are comparatively positive to blast furnaces in terms of environment, so they should develop a more specific plan and improve disclosures. Taking such action will lower the cost of capital and potentially make the company more appealing to ESG focused investors.
Last year, the Tokyo Stock Exchange (TSE) asked all listed companies to enact policies to achieve a price-to-book ratio (PBR) of 1 or higher. How have they been responding?
With regard to our portfolio companies, some have not responded. Others, as it looks bad if they make promises which they can’t deliver on, come up with a plan with a very low hurdle that they can achieve. It might be something like - in three years we will achieve a return on equity of 5% and promise that will increase value above 1 PBR. That'sprobably not that difficult of a barrier to overcome. One of our companies announced that they are targeting 8%, but that that wouldn't be until 2030. I talked to the CEO and said you will be retiring before that, and you won't be responsible.
What types of proposals are you advancing this year?
This year, there are probably two issues that we are focusing on a little bit more. One is the dividend on equity (DOE) as opposed to payout ratio.
The other is coming up with a proper plan to achieve a price-to-book ratio of greater than 1. TSE came out with that policy in early 2023, so we didn't think it was time to start pressuring companies on that last year. But because most of our companies still are not taking the necessary steps, we are crafting proposals to encourage them to do so.
As 2024 progresses, what types of activist proposals are you expecting to see more of?
We don't follow the demands that others are making, but there does seem to be more about business operations. Oasis has been telling Kao it has too many brands in its lineup, so they should concentrate. Elliott has been telling Mitsui Fudosan to sell down their real estate. There are hundreds of public companies that own real estate in Japan, so maybe that will be a higher area of focus than before.
