Hedge Fund Activism in Japan: The Limits of Shareholder Primacy, by John Buchanan, Dominic Heesang Chai and Simon Deakin, Cambridge University Press, RRP£60
by Sir Geoffrey Owen
Whose interests should a company serve? Is it the property of shareholders, for them to do whatever they want with it, or does it have a wider social purpose?
This question lies at the heart of an extraordinary battle waged in Japan in the early 2000s between, on one side, activist hedge funds, mostly coming from the US or the UK, and, on the other, a group of Japanese business executives.
The funds, when they surveyed the Japanese corporate landscape at the start of the decade, saw it as littered with companies that were destroying shareholder value; they were hoarding cash that should have been distributed in dividends and sticking too long with low-return businesses.
The opportunity was obvious, and tempting. Tactics that had worked well in the US and to a lesser extent in the UK - identifying likely targets, acquiring a sizeable equity stake and then putting pressure on the directors to disgorge surplus cash - seemed certain to generate higher share prices. The hedge funds saw themselves as the shock troops of shareholder primacy.
Managers of the targeted companies, for their part, had little interest in shareholder value; they barely understood what the words meant. What mattered to them, and what constituted "corporate value" in their view, was not the share price or any other financial measure, but the ability of the company to prosper and to grow over the long term.
Like most Japanese executives, they saw the company as a community, a concept which, as Buchanan, Chai and Deakin explain in this well-researched and illuminating book, took root in Japan in the reconstruction years after 1945. Under this approach the interests of the company, and by extension those of the employees and customers who sustained it, were given priority over those of investors.
Not surprisingly, the invasion of the hedge funds led to confusion and acrimony. When Steel Partners from the US bought shares in Bull-Dog Sauce, a food manufacturer, and later announced its intention to take over the whole company, the Japanese managers were bewildered. Why had a 100-year-old company with a respectable record suddenly been put in play? What did Steel Partners know about the food industry? When the heads of the warring parties met face-to-face, the discussion merely reinforced the Japanese view that Steel Partners was not out to improve Bull-Dog but was simply a predator.
Bull-Dog adopted a defence strategy the Americans claimed was illegal but the Tokyo High Court ruled that the hedge fund was "an abusive acquirer" and that the defensive measures were legitimate. Although the Americans made a useful profit when they sold their shares, the outcome - like that of another contest, involving British hedge fund The Children's Investment Fund - showed that aggressive tactics by activist investors were unlikely to succeed in Japan.
In other ways - and for this the hedge funds can claim some credit - the Japanese system did become more shareholder-friendly during this period. Foreign institutions were increasing their holdings in Japanese companies; while they did not seek confrontation, they expected dialogue with the directors and higher standards of corporate governance, including in some cases the appointment of independent directors.
The head of Steel Partners once said he wanted to "enlighten" Japan about shareholder value. Today, shareholder value is a valid topic for discussion, but in no way the driving force behind management decisions.
The survival of the company as an enduring organisation still remains a more important consideration in Japan than the investors who happen to hold the shares at any given time.
The writer is author of 'The Rise and Fall of Great Companies: Courtaulds and the Reshaping of the Man-made Fibres Industry' and a former editor of the Financial Times
