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Nov 30, 2002

All dolled up

A visit to Japan finds companies looking outward for new investors

In those happy days before Japan's twelve year long bear market, there was no shortage of investment and indeed little in the way of investor relations. Institutional investors were lucky to get a stake and they stayed quiet.

How times have changed. With aggressive unwinding of cross-shareholdings over the last several years, Japanese companies have had to fill the gap with new investors. The challenge is who and where. Japanese financial institutions? They're diversifying overseas. Domestic retail investors? After twelve years of heartache in the stock market, they're more inclined to invest their savings in gold or post office bonds.

Salvation lies in foreign investors. Indeed the decline in cross-holdings by non-financial Japanese groups to around 20 percent corresponds to an increase in foreign ownership to around the same proportion and a crossover is imminent.

The response by Japanese companies to this trend is dramatic: operational restructuring; corporate governance reform; and the professionalization of investor relations. Just five years ago, Kentaro Aikawa, chairman of Mitsubishi Heavy Industries, told a trade magazine the company valued 'jobs before profit,' adding, 'We don't give a hoot about things like return on equity.' The subsequent sell-off taught corporate Japan a harsh lesson it will never forget.

According to Jim Weeks, head of IR advisor Gavin Anderson & Co in Tokyo, Japanese companies are facing up to questions that old-style cross-holders never asked: What is your cost of capital? Return on equity target? Goal to reduce head count? These queries are coming from domestic Japanese institutional investors as much as from foreign investment professionals. 'Investors are bringing in their HP calculators and doing the math,' says Minako Hattori, a senior consultant at GA. 'Corporate managers have gone home and done their homework, too, studying balance sheets and number flows.'

At the same time, Japanese companies are adapting to a western model of communications. 'They're exploring ways to combine IR, PR and crisis communications to convey the whole corporate picture. They're struggling with convergence issues and corporate governance,' says GA's Jason Kendy. 'There's a land shift in Japan, with companies getting more adept, innovative and aggressive in IR.'

Nomura Investor Relations, Japan's biggest IR advisor, reports that the number of companies doing presentations overseas is rising fast. 'The attitude is changing,' says Yasutomo Tanaka, senior manager of Nomura IR's overseas consulting group.

If English translation is used as a measure, however, progress looks slow. Out of 400 webcasts Nomura does in a year, just 30-50 are translated into English. This IR advisor estimates that around 500 out of Japan's 3,574 listed companies have English web sites, and of Nomura's 224 IR clients, the number is fewer than 20. For now it appears that few but Japan's blue chips have investor relations tailored to foreign investors.

Bloomberg's Miyuki Takahashi, who markets services such as Bloomberg Voice to Asia-Pacific companies, says a mere handful of Japanese companies are conscious of US-style disclosure. 'There are a few leaders, and I have noticed a drastic change in the last two years, but a lot are still very far away,' she says, adding that while IR personnel are out learning about disclosure and Reg FD, they can run into 'obstacles' when they try to implement new practices back at headquarters.

Derek Titterington, head of Asia-Pacific and Japan at Thomson Financial Corporate Group, agrees the attitude towards overseas investors is changing, albeit slowly. 'There is still a mentality of we don't care what the rest of the world thinks. But there is an educational process going on: how do I get out and communicate with these investors?'

The professionalization of IR means companies are investigating who's buying their shares, who their peers are, and where investors are putting their money. It also means the recognition that investors may want a say in the running of the company. Titterington notes that foreign investors are increasingly exercising their right to vote at Japanese shareholder meetings, which makes the process of shareholder identification still more important. 'If companies are going to go out and become more transparent, they have to listen to their shareholders,' he concludes.

Mitsubishi Heavy Industries: new IR philosophy

Mitsubishi Heavy Industries' foreign institutional ownership has gone from around 12 to 25 percent in eight years, a change that corresponds roughly to a decrease in cross-ownership. The company's last CFO used to go regularly to the US and Europe. But overseas roadshows have since been suspended.

Still, the company values its overseas investors, says Toshio Nakamura, general manager of corporate communications. 'Logic works with overseas investors compared to domestic investors,' he explains. 'As long as the company produces results within a certain allowable range, then they don't surprise us.'

MHI's new corporate communications department was launched in April and in May they did their first webcast on Nikkei Net Interactive using Tokyo-based e-Associates. In June they went on to webcast their shareholder meeting. 'Investor reaction has been very positive,' Nakamura says. 'We're going to actively pursue this method of disclosure.'

With several lines of business at MHI, identifying peer companies and establishing comparisons is crucial but tough. 'The purpose of IR is not simply to raise our valuation,' Nakamura adds. 'Our top priority is to build confidence among investors and analysts. By providing more information and improved communication, sudden share price movement can be avoided. Some Japanese companies are following the wrong philosophy and focusing just on stock price. Better disclosure means knowing what investors are looking for, then responding to their needs.'

Orix: standing out in a crowd

Orix is a strange animal among Japanese companies. But for overseas investors, it's a familiar and attractive one. With a portfolio of around 30 businesses, Orix shuffles them according to whether they perform well or not. 'So un-Japanese!' exclaims one Tokyo observer.

Two of Orix's three Tokyo-based IROs are Canadian - Leslie Hoy and Raymond Spencer, who are bilingual in English and Japanese. As Spencer points out, most foreign investors don't speak Japanese, and most senior executives don't speak English. Thus the role of investor relations as bilingual 'in-betweener'.

Orix has used US Gaap since its inception in 1964, held its first overseas IR meeting in 1975, listed on the NYSE in 1998 and began quarterly reporting in July 2001. Along the way, the proportion of foreign ownership has risen from around 20 percent a decade ago to over 40 percent today.

Spencer says Orix's focus, especially in recent years, has been on profitability, not just on market share and the top line. It was a forerunner in Japan in managing according to its return on assets and return on equity.

Orix's overseas investors 'want to know what our strategy is for the next three to five years - where we're going and why, and how we're going to get there. They want to meet management and talk face-to-face,' Spencer explains. He adds that cuts in overseas travel over the last year have led to increasing use of the internet and teleconferencing. Plus, over the last year, the IR team has been working to make their web site into 'the encyclopedia of Orix'. They also recently developed a CD-Rom so investors can save time downloading large documents.

Toshiba: integrated approach

Toshiba is a good example of a Japanese company with a new, integrated approach to IR. Its corporate communications office has four main activities: Japanese media relations, foreign media relations, employee communications and IR.

Toshiba listed in the US in 1962, the second Japanese company after Sony. It went on to list in Luxembourg, Amsterdam, Frankfurt and Dusseldorf. It canceled its ADR in 1978 then listed in London in 1980. That year senior management started annual roadshows to Europe and the US. These trips, says Shintaro Nogi, group manager of IR, are 'key to our IR activities.' Over the last five years foreign ownership has gone from around 10 percent to nearly one quarter.

Toshiba's early European trips mixed group investor meetings with general business events. In the mid-1990s, however, the investment community began to demand more detailed information and the company switched to more one-on-one meetings with large institutional investors. For the last two years Toshiba has employed a market intelligence firm to track major shareholders and help instill a more targeted approach to investor meetings.

'Our top executives believe it's now very important to speak directly to investors, in part so we can learn abut the rapid changes happening in the investment arena,' Nogi says. 'For example, Toshiba is now compared to other companies across Asia, particularly high-tech companies in Taiwan and Korea.'

The web is a vital component of Toshiba's IR program. In 2001 it started Japanese language webcasts produced by Tokyo's e-Associates, and this year began translating them into English.

Daiwa Securities: Brand management

Daiwa Securities Group's IR department traces its inception to July 1998 when the company pioneered Japan's first holding company structure and teamed up with Sumitomo Bank.

The holding company model was unfamiliar to Japanese investors and the IR program was developed to help explain it.

'Cross-shareholdings started winding down at that time so we began targeting foreign investors,' recounts Toshihiko Onishi, general manager of IR and brand management in Daiwa's corporate communications department.

Foreign ownership has since risen from 15 to 29 percent while cross-shareholdings declined from 50 to around 20 percent. Twice a year two teams, led by the CEO and CFO respectively, embark on roadshows to the US and Europe.

The company had planned to launch an ADR on the NYSE in October but pulled back in the face of the Sarbanes-Oxley Act and accounting changes. 'We didn't know the rules of the game we'd be playing,' said deputy general manager of investor relations Keiko Toshiro in the Wall Street Journal. 'So we wanted to know what we were getting into.'

Daiwa's integration of IR and brand management is perhaps unique in Japan. 'Starting last year we have been planning projects worldwide, so there is now a very close relationship between IR and brand management,' Onishi explains. 'Especially for Daiwa, because we are not a manufacturer, it's difficult to differentiate ourselves from our competitors. IR is a weapon to differentiate us from Nomura, for example, among investors as well as clients.'