Japan shouldn’t dismiss hedge fund TCI out of hand

June 15, 2011

By Rob Cox and Wayne Arnold
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

NEW YORK/HONG KONG — The Children’s Investment Fund was humiliated when it brandished the sword of shareholder activism at Japan’s corporate shogunates in 2008. Now the London hedge fund is back with what appears an even more foolhardy campaign — to prod the Japanese finance minister to shake up Japan Tobacco. But this time around the embattled government may have enough to gain to push for corporate reform.

Japanese companies are laggards in the shareholder value revolution. The country’s biggest enterprises have long put job preservation and market share ahead of profits and stock price performance. Past arguments that this reflected a laudable long-term focus have been thoroughly gutted by two decades of deadweight stock prices.

All this was part of the reason TCI and other activists previously banged on the doors of Japan Inc’s medieval boardrooms. But there’s change in the air in Tokyo, largely as a result of the March earthquake, the government’s botched handling of the disaster, and a growing urgency over the country’s huge fiscal problems. This makes the Ministry of Finance, which owns half of JT, a potentially malleable target.

And TCI has a sound case against JT’s management. Over the past three years, the company has lost a third of its value while international rivals British American Tobacco and Philip Morris have gained 42 percent and 32 percent, respectively. That’s before factoring in dividends. On that front, TCI notes that JT’s payouts have amounted to a quarter of its earnings — significantly less than its rivals have handed back.

In the past, TCI’s appeal would have been easy for the bureaucrats of Kasumigaseki to dismiss. But the Ministry of Finance is weaker today. The government is about to put forward a supplementary budget that will ask its citizens to tighten their belts further, including by swallowing higher value-added taxes.

Just narrowing JT’s performance gap with rivals would restore some $13 billion of wealth to the government’s treasury. More importantly, fostering a new business culture in which shareholders — including the pension funds entrusted with the retirement years of Japan’s aging populace — are no longer treated as second-class citizens should help enrich both the government’s coffers and those of its citizens. Whether attributed to any efforts of TCI or not, it’s hard to see how the Ministry of Finance could quibble with that.

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