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In-depth 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

Murakami AyaBorn 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.

  • [2015.10.07]
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