In Hong Kong, if scores of listed companies hold their annual meetings on the same day, it is probably due to the lack of urgency that they attach to the event. Time lingers, until one of the board members realizes the deadline for holding the meeting is fast approaching. Suddenly, all of the function rooms in the best hotels in town are fully booked for an entire day.
In Japan, if 2,000 or more listed companies hold their annual shareholder meetings on the same day, it is for entirely different reasons: fear; safety in numbers.
When a majority of Japanese companies gravitate towards a single day on the calendar, it means that the predatory sokaiya can attend fewer meetings.
Sokaiya are the corporate racketeers who, through the honest purchase of a minimum number of a company’s shares, are legally permitted to attend shareholder meetings. They can then threaten to attend and disrupt the company’s annual shareholder meeting, hurling abuse and hard objects at the company executives – if they are not paid to stay away. What’s more, they can do an enviably good job of unearthing scandalous information about the company and its executives, and threaten to ask awkward questions at the meeting: a cross between an ace investigative reporter and a shareholder rights activist turned bad. They are also effective in silencing the enquiries of genuine shareholders, through complicity with other companies that want to suppress dissent. This, of course, goes some way towards stunting free speech and genuine shareholder activism. Some shareholders may have a genuine grievance but feel threatened enough to hold their tongues.
Other means of extorting money had been subscriptions to special publications and potted plant rental, always at exorbitant costs.
On the wane
All this sounds like an IRO’s nightmare but the good news is that sokaiya activity at this year’s round of June annual shareholder meetings was more muted than it has been in previous years. Numbers have been declining for some years now. Police stationed at the more than 2,000 annual shareholder meetings on the morning of June 29 reportedly sighted only 18 racketeers, compared with 54 the previous year. About 84 percent of companies listed on the Tokyo Stock Exchange held their shareholder meetings at 10am on June 29, down from more than 96 percent – almost all – in 1995, according to the Tokyo Stock Exchange.
IR practitioners in Japan put the ebbing influence of sokaiya down to tough new regulation and the heavy police turnout at shareholder meetings. The Commercial Code, revised in 1997, regulates the giving or receiving of monetary benefits from companies based on illegal transactions, with a penalty of three years in prison or a fine of Â¥3 mn. Those found guilty of threatening a company can expect a jail sentence of up to five years or a ¥5 mn fine.
And besides, according to Thomas Zengage, managing director and CEO of International Business Information Inc, the sokaiya phenomenon is often exaggerated by newspaper reports. ‘It’s a little bit overblown. Gangsters are an everyday thing in every country, even in the US, but it’s a little bit more in-your-face in Japan.’
Toshiyuki Fujita, senior advisor for investor relations at Cosmo Public Relations, agrees. ‘Sokaiya can be considered similar in practice to the gadfly seen in the US,’ he says. Nevertheless, police remain on guard to make sure it stays that way, banishing the sokaiya into the anonymous arena of cyberspace. The internet has become a new source of opportunity for these corporate opportunists, where they are able to post scandalous notices on any day of the year.
Still repugnant
Many IR people approached were reluctant to speak either on or off the record on the subject of sokaiya. The very word seems to grab the listener in Japan in much the same way as would foul language: something unspeakable and repugnant.
‘There has definitely been a decrease in the activity of sokaiya,’ said a British IR consultant in Tokyo, requesting anonymity. ‘The reason in part is because there has been a number of watershed cases, for example the case of Nomura Securities and Dai-Ichi Kangyo Bank, where it really came to light.’
The watershed, which came in 1997, led to the revisions in the Commercial Code. That year, an unprecedented number of companies were discovered to have paid millions of dollars to sokaiya, in some cases for as long as a decade. Numerous top executives resigned and were consequently jailed after a lengthy legal process. Companies implicated included the then ‘Big Four’ brokerages, Nikko Securities, Nomura Securities, Yamaichi Securities and Daiwa Securities, as well as Dai-Ichi Kangyo Bank. In the same year, other, non-financial companies were also enveloped in sokaiya scandals, including Mitsubishi Motors, Hitachi Group, Asahi Bank, Dai Nippon Printing and Matsuzakaya, among others.
The Dai-Ichi Kangyo Bank case was the theme for a hugely successful movie in Japan last year, which featured a big bank that paid hefty subscriptions to sokaiya for exclusive magazines.
But despite their tormentors’ high profile, companies have not found it easy to sever links with the racketeers. ‘It’s one of those instances where everybody is afraid to take the first step,’ the British consultant explains. ‘There was a rumor, unsubstantiated, that when Nomura Securities announced it was severing its ties with sokaiya, the firm had bullet-proof glass installed in its offices and in the president’s car. But by taking such an unprecedented step,’ he goes on, ‘it has given other high-profile companies the confidence to follow suit and announce they too would cut links with the sokaiya.’
Keeping vigilant
Zengage recommends a good investor relations program to ensure that the sokaiya are kept at arm’s length. ‘Companies should know who their investors are, like any good company would, so that they can appeal to the better angels.
‘They should be careful when they’re approached,’ Zengage continues. ‘When some sleazy organizations come along they should be careful of the schemes. They should always keep an eye open.’
Fujita says that many companies now have internal ‘compliance’ codes. ‘When the annual meeting is approaching, most companies start preparation for the meeting and for encounters with sokaiya fairly far in advance,’ he says. But clearly companies have no way of preventing any shareholder from attending the meeting if they have the acceptable level of shares.
Companies also now prepare complete Q&A documents, in order to prepare as thoroughly as possible for issues that might be raised by sokaiya. Executives are not obliged to answer their unconventional questions and they are within their rights to pass on to the next scripted resolution. But they may risk having to dodge unidentified flying objects if they refuse.
One executive, who had faced heckling at his company’s annual meetings for years had an ashtray thrown at him for not answering questions relating to a ‘secret lover’. At another meeting, a Fuji executive had a whisky bottle thrown at him.
Western influences
Another reason for the decline in sokaiya activity could be the influence of western partners moving into the country via increased levels of M&A. But the British consultant comments that given there are more than 2,000 listed companies in Japan, this is unlikely to make a serious dent in the sokaiya’s business. ‘Given the total of over 2,000 listed companies, the number of mergers among listed companies is still very small in absolute terms.
‘Certainly in cases where western shareholders are involved, the influence on the management is higher. There is also a general trend towards greater transparency in Japan. Some companies don’t want to have meetings on the same day as everybody else.’
According to Zengage, the Japanese are becoming increasingly excited about IR. The Japan Investor Relations Association now boasts about 300 corporate members and is growing fast.
‘Japanese companies are in the market for fund raising, and they’re becoming more global because of the banking crisis in Japan,’ Zengage points out. There’s no doubt that Japanese companies are increasingly adopting international standards of corporate disclosure; and they are becoming generally more sophisticated.
The improvement in corporate governance and disclosure is ‘also being driven by Japan’s new stock markets, such as the (Tokyo Stock Exchange’s) Mothers market for emerging companies,’ says Zengage. ‘Nasdaq has also come to Japan and it has the same disclosure practices here as it does in the US. Japanese companies are also disclosing more than they did before, one big shift being towards consolidated reporting, which they don’t traditionally like, but which global investors want. They are becoming more open and responsive to investors.
‘It’s an island nation and they have their own way, but they’re beginning to walk and quack a bit more like an IR duck,’ he adds. Zengage says that after 30 years in Japan, he is seeing a gradual improvement over time. ‘Investor relations is beginning to get people’s attention. About seven or eight years ago investor relations just was not a word known to the Japanese language.’
Any resistance to investor relations from the older, more conservative ranks of Japan’s of senior executives will, with time, be overcome by the younger generation, according to local IR professionals. ‘With the younger generation coming in, it’s changing,’ maintains Zengage. ‘Working with Japanese is a major long-term investment. A lot of them have to learn to trust you; it takes time and effort. It’s a tough market for everything and you have to pave your way every step of the way.’
Shareholder inactivism
And yet, in Asia, shareholders are for the most part pretty passive creatures. They’ll stoically and unquestioningly give the thumbs up to the owner-chairman’s plans to sell his personal property to the company in which he holds a majority stake. After passing a number of resolutions unchallenged, executives and shareholders adjourn to chat over tea and biscuits.
It’s only in the past few years that small investors in Hong Kong and elsewhere in the region have begun to stick up for themselves. More dissent is being heard in the function rooms of Asia as the values of good corporate governance rise from the ashes of the Asian financial crisis that imploded the region in 1997.
In 1995, one old man made the front pages and newswires in Hong Kong simply by standing up (in pajama bottoms, admittedly) and questioning the management’s motives behind a huge inter-group asset shuffle. He also announcing loudly that it would never have happened in the chairman’s late father-in-law’s days.
But as in so many other quirky ways, Japan is different. Sokaiya are part of the broader yakuza tradition of troublesome involvement in the darker side of business and politics in Japan. Sokaiya have been described as ‘common fixtures’ of Japan’s business world. Annual meetings are probably a small sideline in a black-market business that reaches all the way up, or down, to drugs, prostitution and bigger, more ‘respectable’ activities, such as investments in listed companies. And back to those shareholder meetings.
Definitely unique
Despite claims by IROs that Japan is really no worse than anywhere else in the world for racketeering, and that the press blows the sokaiya issue out of proportion, Japan’s shareholder meetings are definitely unique. Nowhere else in the region, or the world, would teams of police attend almost all annual meetings.
According to Cosmo’s Fujita, the presence of sokaiya at shareholder meetings does little to deter genuine shareholders from attending, though they may help to keep them quiet.
‘Sokaiya at annual meetings do sometimes raise tensions, not only among the management but among the general shareholder population as well,’ he says. ‘Generally, institutional investors do not attend the annual meeting, but rather, they submit their proxies in advance.’
Whether sokaiya activity is really in decline, as official figures indicate, or whether companies are just more discreet in their payments, is difficult to determine because it is not something that is openly discussed in Japan.
‘This is difficult to quantify, because the damage done by sokaiya is always done underground and it is difficult to estimate the total amount illegally paid,’ Fujita concludes. ‘However, many Japanese companies are now working to improve the structure of their boards and audit systems, so these payments may become more transparent in the future.’
