West Coast investors ask the toughest questions. East Coasters carefully study figures, plans and projections. European investors are polite, conservative and long-term, posing many of the same questions as Japanese funds.
And so Japanese IR comes of age in the eyes of Koji Yanai, the administration adviser at Sagami Chain Company, a mid-sized Nagoya company which just completed a roadshow blitz of North America, Europe and the Pacific Rim.
Yanai is one of the new generation of executives leading the next wave of Japanese IR. Where once only the mammoth Sonys and Hitachis dared to tread, small and medium-sized companies like Sagami are venturing out to face foreign investors with active IR programmes. Such a programme assisted the noodle restaurant chain in gaining the distinction of Excellent IR in the Japan Investor Relations Association’s (Jira) first such awards in October.
Yoshiko Sato, Jira programme director, confirms the rapid progress of Japanese IR. The association has grown from 117 to 198 ‘very enthusiastic’ members since it was established in 1993. ‘They are forward looking and specific,’ says Sato of the companies she meets. ‘The major interest these days is focused on foreign investors and building programmes to meet that need.’
No wonder. It is the foreign investment community that has propelled the latest rally, sparking Japan’s hopes in the six long years since the bursting of the Nikkei bubble. By March 1996, the average foreign ownership of Japanese equities reached 9.4 per cent, an impressive increase of some 20 per cent over 1995. In a recent global investment study, the Securities Industry Association observes that foreign investors have been the largest investors in Japan throughout the 1990s, playing a key role in keeping prices from falling further as domestic investors sell off stock.
However, cracks in western sentiment are showing, with foreigners proving net sellers of stocks in Tokyo for the first time in 18 months this July. What looked like an IPO hit parade recently may be a share surplus, forcing new issues to be scaled back or postponed. Still, most observers are looking for the rally to continue.
Statistics suggest that Japanese IR programmes are rising to meet that foreign challenge. According to Technimetrics, the number of Japanese companies going on IR roadshows abroad is around 120 this year, about one and a half times the number in 1993. A Jira survey shows that about 85 per cent of the association’s members issued an annual report in English this year.
According to Hiroshi Tokura of Nomura Investor Relations, an arm of the powerful brokerage house Nomura Securities, Japan is well along the path of institutionalisation that the US embarked on in the 1970s. ‘Since 1990, retail investor holdings in Japanese companies have steadily declined to around 22 per cent,’ he explains. ‘They could not profit out of equity after the bubble burst, and hired professional investors to play the market.’
The institutionalisation process has created a demand for better IR. ‘Institutions will not invest in a company which gives good information when earnings are good, but doesn’t communicate when earnings go underwater,’ says Tokura. He points to the activities of IR newcomers which are following the lead set by Sony and other international companies of the same ilk. And while established mid-sized companies gear up for IR programmes, emerging OTC companies are also spreading their name around.
Communicating with institutions has become critical in the post-crash environment. When the Nikkei was flying up towards the 40,000 mark, investors sat back and enjoyed the profits. Few cared about whether a company was going to issue a dividend of 1 or 2 per cent when they were faced with 30 per cent returns. However, when the market spiralled down, institutional money managers had to look deeper in order to achieve any kind of return. At that point, dividends policy and management issues became of much greater concern. In fact, the big insurers, some of which held billions of dollars of Japanese equities, are rumoured to be looking at why some companies are not as productive in terms of dividends as others.
John Taylor of the Washington-based Investor Responsibility Research Center points out that larger listed companies are also taking a longer look at their IR programmes for a variety of reasons. Companies like the Sumitomo group are turning to investor relations to support financing efforts as cross-holding among group companies rapidly declines. With senior managers no longer confident that group companies will hold stock at any cost, the search is on for new stable investors.
Banks, in particular, are faced with a need to communicate with investors due to pressure to go to market after bad debt write-offs. With trillions of yen of bad loans marring the balance sheet, the need to increase capital to support regulatory requirements has become a keen concern. At the start of this year, banks were planning to raise some 3 trillion in equity.
Indeed, Taylor observes that ‘We’re not doing enough IR’ has become a widespread mantra in Japan – albeit vague: ‘It’s not entirely clear what companies intend to do in the future. First they want a better idea of who their shareholders are, and who they may be. Many companies are worried about being blindsided by US pension funds with established corporate governance agendas.’
Most companies remember all too well the front-page headlines in local business papers when Calpers wrote to Nomura and Daiwa about board independence a few years ago. Nor will they forget the brief attack of one of America’s greatest corporate raiders, T Boone Pickens. During the Calpers situation, one point of confusion surrounded foreign ownership. Taylor remembers one issuer announcing with confidence that the shareholder register had been checked and all US holders were financial institutions like State Street. It came as something of a shock for that company to learn that State Street was the global custodian for Calpers via Sumitomo Trust.
It seems that for many Japanese companies, institutions taking an active role at the annual meeting smacks of the so-called sokaiya gangsters that traditionally shook down management at the meetings. They simply did not seem the right venue for legitimate shareholders to establish communications with management, says Taylor. But nasty incidents are on the decline, freeing up IROs from dealing with the sokaiya and allowing them to concentrate on their real job.
Nonetheless, the more activist US institutions like Calpers may find themselves faced with formidable adversaries as they take their corporate governance crusades overseas. As one cynical IR consultant notes, Japanese IROs are more used to dealing with gangsters than with US pension funds, and when the gloves are off they know what to do.
Dining Out with Sagami
On the list of Jira award winners, together with the likes of Sony, Hitachi and East Japan Railway Company, is a little noodle company with a long-term and conservative growth strategy. Jira commended Sagami Chain Co for creating an IR model for middle-sized companies by disclosing monthly data, releasing English information and holding information meetings outside Japan.
Sagami’s aggressive IR programme boosted foreign ownership from 11.5 per cent to 18.5 per cent in the first half of 1996. ‘That’s pretty successful,’ muses administration adviser Koji Yanai. ‘At least our directors seem to think so.’
Sagami launched its 1996 itinerary with a Pacific Rim tour in April, meeting investors one-on-one and in group meetings. Management presented a five-year financial summary, a five-year projection of sales and earnings, along with a peer comparison chart of its 14 largest competitors showing everything from current stock price to PE multiples and return on equity.
The one-hour information session was well-polished by the time Yanai took it to the US for a month-long trip in August. And it was decidedly slick by the time of the two week roadshow to Paris, Frankfurt, Geneva, Edinburgh and London at the beginning of October.
Sagami is aiming to raise awareness of its name both at home and abroad. Yanai says IR has been key to reaching this goal since Sagami first listed on the Nagoya Stock Exchange in 1991, and invaluable to its July listing on the TSE’s second section. Now Sagami’s main task is raising its return on equity from 7.4 per cent to 10 per cent in the next five years. ‘We want to do a steady, step-by-step expansion,’ explains Yanai.
Spreading the World
World Company’s name alone signals a global attitude. With some $1.3 bn in shares outstanding and 7 per cent foreign ownership, this leading Kobe-based apparel company has its sights set on more foreign investment. To date, though, World has reached the other side of the globe without having to leave home, by conducting regular information meetings with foreign investors and analysts based in Japan.
Besides semi-annual meetings and an English language annual report, World has around three meetings a year with up to 15 top analysts. ‘This has helped the performance of World’s share price,’ comments Toru Fukuda of Nomura Investor Relations, which counts World among its clients. World hopes to attract investors with an impressive turnaround in the year ended 1996, with earnings per share of 87.09 against a loss of 203.22 per share in 1995. Part of last year’s problems stemmed from the massive earthquake in World’s hometown.
According to Nomura IR, World had already completed the bulk of its growth by the time it listed in 1993 on the second section of the Osaka Stock Exchange. But now, armed with an English-Japanese Web page and an internal investor relations department, World is aiming to maintain stable growth by creating new markets through aggressive promotion.
