Corporate Governance: Can Japanese Business Adapt to a New Era?

In Pursuit of Good Governance: An Interview with Murakami Aya of C&I Holdings


Murakami Aya, CEO of the investment firm C&I Holdings, explains her company’s approach as an activist investor pushing corporate management to implement proper governance.

Murakami Aya

Born in 1988. Daughter of Murakami Yoshiaki, whose Murakami fund drew attention as an activist investor in the first half of the 2000s. Graduated from Keiō University. Worked at Morgan Stanley MUFG Securities and then joined C&I Holdings, where she became chief executive in 2015.

In 1999 Murakami Yoshiaki left his job at the Ministry of International Trade and Industry (now Ministry of Economy, Trade, and Industry) and established the so-called Murakami fund. This investment group quickly gathered attention for its stance as an activist investor, buying shares in companies with low share prices and assets to spare and pushing strongly for increased returns to shareholders and the sale of businesses. In 2006 he was arrested and charged with insider trading in connection with the attempt by Livedoor to acquire Nippon Broadcasting System, and he liquidated the Murakami fund.

Murakami is currently pursuing a similar agenda through C&I Holdings. This family-owned investment company is giving top billing to corporate governance and strongly demanding that its investment targets increase their corporate value. C&I is currently in the limelight as an activist investor pushing Kuroda Electric (Japan’s top electronic parts trading company, listed on the First Section of the Tokyo Stock Exchange) to improve its governance. It is demanding that Kuroda increase returns to shareholders, put its cash to work, and give Murakami and three other outsiders seats on its board of directors.

We spoke with Murakami Aya, Yoshiaki’s daughter and C&I’s chief executive, about her business and its aims.

Investing in Companies with Low Price-to-Book Ratios

INTERVIEWER   First let me ask about the investment policy of C&I Holdings. How do you decide on investment targets, and what’s your stance in making demands as an investor?

MURAKAMI AYA   C&I basically manages all of our family’s private funds. The Murakami fund previously operated by my father [Murakami Yoshiaki] handled money from customers, so it had a fiduciary responsibility to them. But with C&I we’re taking all the risks ourselves. And so we’re able to invest for the longer term.

Basically what we buy are undervalued stocks. There’s a widespread misconception that we’re looking for companies without good corporate governance as investment targets, but the real reason we’ve invested in many such companies is that the bargain stocks we’re looking for are often those of companies with a clear lack of proper governance.

When it comes to judging whether stocks are undervalued, of course we consider indicators like the P/E [price-to-earnings] ratio and P/B [price-to-book] ratio. There’s little difference between the US and Japanese stock market in terms of P/E ratios, but if you look at P/B ratios, the overall figure for the US market is 3, while the figure for Japan is only 1.5. So there are very many Japanese companies whose stocks are bargains by this measure.

Given the provisions of the Stewardship Code [Principles for Responsible Institutional Investors] adopted last year and the Corporate Governance Code that came into effect this June, P/B is the place where we can see room for increases in share prices in Japan. Basically speaking, we look for the most part at companies with a P/B ratio less than 1.

Focus on Capital Efficiency

INTERVIEWER   Is your stance focusing on undervalued stocks based on a medium- to long-term perspective still unique in the Japanese investment world?

MURAKAMI   I don’t think we’re “unique,” but others often say that about us. If we are unique, it’s probably in the way that we continue to be active even when the situation turns adversarial. And the perception of our “uniqueness” is probably heightened by the fact that we’ve held to corporate governance as an investment principle. This basic stance is the same as the one my father adopted a decade ago as head of the Murakami fund. But the term “governance” didn’t have wide currency at that time. Now we see a move toward emphasizing corporate governance, but even though this change is underway, people still tend to focus on things like stockholder returns, buybacks, and dividend policy.

What we always call for is improvement of capital efficiency. And in this context we consider not just buybacks and dividend policy but also industry reorganization, acquisitions, mergers, and ultimately even the sale of companies [that we’ve invested in]. I think what sets us apart from other investment funds is our strong insistence on comprehensive capital efficiency improvement. Sometimes this means lengthening the term of our investment, and it can also result in lower IRR [internal rate of return] figures. Regular investment funds that manage money for clients can’t take this approach.

Since C&I looks at corporate governance and capital efficiency, we’re aiming to invest in a way that will increase corporate value over the medium to long term. That makes our investment behavior somewhat different from that of other funds, and I believe this is why people sometimes call us unique.

Violations of the Rules Cannot Be Tolerated

INTERVIEWER   In Japan it seems to me that we still have a society that considers it ethically unacceptable to make profits by investing in companies, along with a corporate culture that considers companies to belong to themselves and that allows them to operate solely for the sake of those with executive authority, a tightly delimited group of insiders.

MURAKAMI   On a basic level, the introduction of the Corporate Governance Code has produced a dramatic improvement. Though the code isn’t legally binding, it provides a set of guidelines for listed corporations to refer to. From now on, it will be a given in companies’ dialogue with investors. I believe that this will lead to further changes among CEOs.

In society as a whole, though, I do think that there’s still considerable resistance to the idea of making profits by investing. The tendency to look askance at making money or pursuing profits continues to have a certain hold. For example, since the Toshiba accounting scandal came to light, people have blamed the malfeasance on pressure to improve current profits. But the problem wasn’t in seeking profits. Every chief executive seeks profits. It was in the violation of [accounting] rules.

INTERVIEWER   C&I has become a major shareholder in Kuroda Electric, and your confrontation with the company’s management has been attracting attention. A special meeting of shareholders on August 21 rejected your call for the appointment of outside directors to the company’s board. The company used a statement from employees opposed to the C&I demand to persuade other shareholders not to support you.

MURAKAMI   Thanks to whistleblowing from inside the company, we were able to determine that this statement was a fabrication. We have a recording as evidence that the statement was drafted on orders from the company’s chairman and president. This statement was issued to encourage investors to exercise their voting rights in a way that would benefit the company’s management. Using a fabricated document to influence voting in the hallowed forum of a shareholders’ meeting is a terrible breach of the rules. It won’t be possible to improve Japan’s corporate governance if this sort of behavior is allowed to stand, so we intend to pursue this matter according to the proper procedures.

The Importance of Proper Valuation

INTERVIEWER   As part of Prime Minister Abe Shinzō’s growth strategy, his administration has come up with the Corporate Governance Code and Stewardship Code, which aim to strengthen investor oversight of companies. Do you see these codes as having an effect in practical terms?

MURAKAMI   I think that they are having an effect and that their impact will increase as time goes by. The only major problem with the Japanese market versus the US market is the high level of retained earnings at Japanese companies. If you look at ROE [return on equity], the figure for Japan is only about 7%, against 15% for the United States. And the reason for this big difference is the size of companies’ retained earnings. If these internal reserves were slashed, the Japanese figure would become comparable to what we see in the United States. Most of the companies that have especially large levels of internal reserves are ones with cross-held shares. Almost all of the companies with P/B ratios like 0.4 or 0.5 have net cash exceeding market capitalization, along with substantial real estate holdings and cross-held shares.

The appropriate level of risk weight for companies to hold should be statistically evident in the wake of events like the Lehman shock [the crisis following the collapse of Lehman Brothers in September 2008] and the Great East Japan Earthquake [March 2011], but it seems to me that many Japanese companies have failed to address this issue.

The system of raising funds through direct financing presupposes the existence of proper share prices. But today’s Japanese corporations are failing completely in this respect. Meanwhile, the problem with the Japanese economy as a whole is that nobody is borrowing money from banks. The money supply is growing, but the funds aren’t making it out into the market. This is because companies are hanging on to such high levels of internal reserves.

If businesses don’t take out loans from banks, the banks can’t make profits. Lending is like the blood supply for the economy. If funds are circulating, they boost economic activity. Management at listed companies needs to calculate appropriate risk-weighting levels and raise funds accordingly.

Put Cash to Work and Aim for Higher Share Prices

INTERVIEWER   With the spread of sound corporate governance, will calls from shareholders be able to change the status quo, where companies are sitting on cash rather than investing it?


AMI   It’s been a bit over a year and a half since the Stewardship Code was introduced and just half a year since the Corporate Governance Code was launched, but the effects have already been dramatic. Foreign activist funds have also stepped up their involvement in Japan. So I’m confident that the investment environment will change.

INTERVIEWER   You earlier referred to raising capital efficiency as the measure of corporate excellence. Can you give some examples of companies or CEOs that meet this test?


AMI   A firm like SoftBank that takes on challenges and produces results is a good company. Tackling challenges means, for example, using internal reserves to make investments or leveraging capital in pursuit of higher profits. In practice, companies that do this enjoy rising stock prices and growth in scale, so CEOs that take this sort of approach are the ones we like to support as investors.

In Her Father’s Footsteps

INTERVIEWER   Your father closed down his Murakami fund in 2006, and over the decade since then the world has seen major changes, including the Lehman shock and the March 11 disasters. How do you feel about constantly being talked about and interviewed in terms of how you compare with your father?

MURAKAMI   I think the media basically wants to talk to my father and get his comments, not mine. I’m grateful for the attention my father brings to our company. And I think this is why I get opportunities to talk about corporate governance.

INTERVIEWER   Your father accomplished some major undertakings [as head of the Murakami fund], such as the merger of the Hankyū and Hanshin railway companies. What sort of impression did you have of him at the time?

MURAKAMI   I was in high school at that point, so I really didn’t understand anything about my father’s activities. I was going to school in Switzerland, so I wasn’t exposed to the Japanese media either. When I saw a TV news story about him on the plane as I was flying back to Japan, it came as quite a surprise. Then he was arrested; in college I had the experience of people giving me nasty looks and gossiping about me, which made me feel a certain amount of resentment toward him.

Now that I’m working in the same field as my father, my assessment is that he was quite correct in his stance regarding the proper shape and governance of listed companies.

INTERVIEWER   I would think that in most cases someone whose father was arrested would want to follow a different career path. What motivated you to carry on with his work?

MURAKAMI   My father’s arrest motivated me to investigate whether he had really done wrong. I decided to look for a job in the world of finance when I graduated from college and, after a few years, to leave that job and try working alongside him as a fund operator.

Another consideration was that the task of spreading the practice of good corporate governance among Japanese companies hadn’t been completed in my father’s time [with the Murakami fund]. Japan’s listed companies are still only partway there. If they properly undertake to build up their stock prices, it will ultimately benefit Japan as a whole and promote the country’s economic development. I decided that I wanted to help out in the process of reaching this goal.

Satisfaction for All Stakeholders

INTERVIEWER   What’s your next objective?

MURAKAMI   As I see it, there are two sides to corporate governance. One side is to avoid violations of the rules, such as those we’ve seen at Toshiba and at Kuroda Electric. This means governance directed at compliance with laws and regulations and strict observance of relevant rules. The other side is for CEOs to work toward achieving proper pricing of their companies’ stocks in keeping with the Corporate Governance Code.

I think our company is the only fund that’s currently addressing the aspect of compliance violations. Whistleblowers emerged at both Toshiba and Olympus, and I would say that this reflects the fact that CEOs of listed companies have been failing to follow the rules. At C&I, in addition to pushing for proper stock price formation, we intend to work toward having every listed company implement proper legal compliance and achieve satisfaction for its various stakeholders, including employees.

(Based on a September 7, 2015, interview in Japanese.)

Olympus Toshiba Murakami corporate governance Yoshiaki stakeholder shareholder compliance