Toyota’s Longtime CEO Finds Himself the Target of U.S. Governance Activists
Japan is a target-rich environment for activist investors. Half the country’s listed companies trade below book value.
Two large, bellwether U.S. institutions, California Public Employees’ Retirement System and the Office of the New York City Comptroller, are training their guns at the heart of Japan Inc. They’re voting to oust the chairman of Toyota Motor 7203 +1.36% (ticker: 7203.Japan), Akio Toyoda, at a June 14 shareholders meeting.
The world’s top auto maker isn’t the worst-run firm in Japan. But the broader impulse to challenge well-insulated boards and managements looks like a good one, and may boost a long-awaited rally in Japanese stocks. The iShares MSCI JapanEWJ +1.14% exchange-traded fund (ticker: EWJ) has gained 12% this year, matching the S&P 500SPX +0.11% .
The business case against Toyoda centers on his slow pivot to electric vehicles, even as sales of Toyota Prius hybrids fell by more than half over the past decade.
“A silent majority in the auto industry is wondering whether EVs are really OK to have as a single option,” he said in December.
On Toyoda’s watch, between 2014-16, Toyota sold a 3% stake in Tesla TSLA +4.06% (TSLA), a $21 billion mistake at the EV pioneer’s current valuation.
Toyoda, 67, already stepped down as chief executive in April, though. Successor Koji Sato lost no time proposing 10 new EV models, with projected annual production of 1.5 million cars by 2026. Executing on these ambitions may be tough, but the direction looks right. “Toyota needs to restore BEV [battery electric vehicle] business competitiveness to drive a full-fledged rebound,” says Jefferies analyst Takaki Nakanishi.
Toyoda, whose grandfather founded Toyota in 1937, also typifies a form of Japanese corporate governance that is under increasing pressure. While owning just 1% of the stock, the founding family retains decisive influence through cross-holdings in a web of affiliates like parts maker Denso 6902 +2.53% (6902.Japan), and a tradition of deference. The New York City Comptroller’s office is voting against the whole slate of Toyota directors, finding they “lack adequate independence.”
“Managements have been protected for decades by a moat of cross-shareholdings and the complacency of other shareholders,” says Seth Fischer, chief investment officer at Oasis Management, which is pushing change at several Japanese companies (though not at Toyota).
The moats are under assault from multiple directions. The Tokyo Stock Exchange lately demanded that below-book-value companies submit plans to boost their share prices; it’s threatening eviction from the coveted TSE Prime Market Index for noncompliance. The powerful Ministry of Economy, Trade, and Industry is working on new merger-and-acquisition guidelines that would ease takeovers and consolidation.
Managers are getting the memo, says Adrian Gornall, head of investment advisory at Astris Advisory Japan. “There’s been a sea change in the attitude toward shareholder returns: buybacks, dividend payouts,” he says.
Toyota won’t be the hottest battleground in this Japanese annual general meeting, or AGM, season. Canon ’s (7751.Japan) 87-year-old chief executive, Fujio Mitarai, barely kept his job, with 50.59% shareholder approval. Seven & i Holdings (3382.Japan), parent of the U.S. 7-Eleven convenience chain, is fending off demands to shutter unprofitable stores.
Nor is governance the key factor in Japan’s market revival. “A return of controlled inflation and relative political stability are driving the rally,” says Hidekazu Ishida, an advisor to FinCity.Tokyo, which aims to boost Japan as a financial hub.
A governance revolution won’t hurt either, though. “No one wants to be the next activist target,” Ishida says. And watch out for those new Toyota EVs.