Corporate Japan and the 'Pickens Affair'

The Story about T. Boone Pickens Taking on the Japanese "Keiretsu" System. A Failed Foreign Activist Campaign Still Haunting Japan's Market of Corporate Control Three Decades Later.

Oct 25, 2022

At the end of 1980 T. Boone Pickens, a well-known U.S American corporate raider, participated in a TV Program called Ethics in America- The Anatomy of a Hostile Takeover, (Video) featuring, among others, Warren Buffett, Sir James Goldsmith, Rudy Giuliani and Robert E. Mercer, CEO of Goodyear.

It is a debate about ethical issues faced in the market of corporate control in the U.S. on basis of a hypothetical case study concerning an unsolicited takeover bit of an American corporation.

The discussion mainly revolves around the question what the purpose of Corporate America really is. Should shareholder interests be prioritized over all other corporate stakeholders (Shareholder Primacy), or does it serve the interest of all stakeholders, customers, suppliers, employees, local communities and shareholders (Stakeholder Capitalism).

In a strange twist of events an investment group led by Sir James Goldsmith would later target the Goodyear Tire and Rubber Company.

Picken’s Targeting Koito Manufacturing

But more importantly, in April 1989, T. Boone Pickens would target corporate Japan. Unleashing Japan’s first shareholder activist campaign led by a foreigner, labelled within Japan "The Pickens Affair".

Out of nowhere, Pickens turned up being the largest shareholder of Koito Manufacturing, a leading auto parts maker that had close business ties to Toyota Motors. He held a 20% stake in the company, that eventually would increase to 26%, worth roughly 800 million Dollars.

Pickens clarified that he was not intending to take control of the company, an impossibility anyway. In the U.S. with its diverse ownership structure, and many shareholders not bothering to vote at the AGM, a 26 percent stake indeed would have accounted for a controlling interest in most cases.

With Koito not so much! Eventually Pickens would learn the hard way that he was fighting city hall when taking on a corporate governance system known as “Keiretsu”. A structure with cross hold shares, interlocking board of directors and obscure business interests.

In Koito’s case, Toyota had not only been its major shareholder, with three board seats occupied by directors with close relationships to the company, but also its main customer.

Pickens claimed that Toyota was able to negotiate supply contracts in their favour and to the detriment of minority shareholders like himself. Among other things, he demanded four seats at Koito’s 20-member board, a dividend increase and detailed insight into Koito’s internal accounting.

Pickens certainly was on to something. The Keiretsu system was a rigged game. In the case of Koito, a simple comparison of sales - to gross margin growth rates (10% vs. 3%) clearly indicated self- dealing transactions.

It was a curious case at the height of Japan’s bubble economy and trade frictions between the U.S. and Japan boiling. Without doubt, Toyota had something to hide, and they did not want any outsider to scrutinize their control and influence over Koito. But neither did Pickens fight fair and square.

Most importantly, and certainly not helping him turning into “the crusader for the righteous cause”, he used Japan's weaker regulations, evading important disclosures about the financing of its block of shares in Koito. A fact that in the U.S. would have had to be disclosed.

Kitaro Watanabe: The Japanese Financier Behind the Scenes

Subsequently, it would turn out that he received the shares in Koito from a Japanese financier called Kitaro Watanabe, at that time the world sixth richest person.

Rumours swirled that Mr. Watanabe also had lent the money to Pickens to buy into Koito, with the stake being collateral. Those rumours raised an important question. Was Pickens really the ultimate owner of the 26% stake in Koito Manufacturing?

Like Pickens within the U.S., who liked to present himself taking on America’s “fat-cat management class” for the good of small shareholders, Mr. Watanabe had a checkered reputation within Japan.

Apparently, before Mr. Watanabe found its way to Texas, he had “Greenmailed” Koito Manufacturing. Trying to get the company to buy back his block of shares at a premium over his acquisition price.

In the 1980’s Japan was the home of “Greenmail”, a practice known in the country as "cornering". The usual pattern was a Japanese investment group buying up a substantial holding in a listed company. Given the aforementioned corporate structure in Japan, with “firm hands” like main banks and affiliated companies holding the biggest chunk of outstanding shares, readily traded volume on the Japanese stock exchanges was limited Thus, share prices of targeted stocks went sky-high in little time.

The cornering group then would approach management, demanding to buy back their accumulated holding at the artificially inflated price. If the company refused, it threatened to wreak havoc at the company's general shareholder meeting with little help of “Sokaiya”, a type of professional corporate racketeers.

Before buying into Koito, a cornering group, presumably affiliated with Mr. Watanabe, had targeted Toyota Automatic Loom Works, the original core company in the Toyota Motor Keiretsu. With bitterness the Toyoda family finally bought them out.

Mr. Watanabe assumed that companies affiliated with Toyota were easy cornering targets. But in Koito’s case the Toyoda family did not bite, forcing him to find an alternative buyer, paving Mr. Watanabe’s way to Texas and Pickens’ way to Tokyo.

Koito Manufacturing Taking on the Fight

Unfortunately, like Mr. Watanabe within Japan, Pickens also had garnered a reputation as a greenmailer within the U.S.

The “greenmail argument”, irrespectively of being factually correct or not, provided a convenient pretext for Koito’s management to present Pickens to the Japanese public as some kind of “American- Sokaiya”, and blatantly deny him most of its legitimate rights as a shareholder.

Koito refused to supply detailed financial information to Pickens, it opposed Pickens' proposed resolution prohibiting preferential practices, it baffled his attempt to appoint members to the Koito Board of Directors and would not increase the dividend. Koito even, unsuccessfully, tried to block Pickens from registering its shares.

A real low point of the “Pickens Affair” was the Koito shareholders meeting in June 1989. Pickens flew out to Tokyo to make his case at Koito’s AGM. Disgruntled, he left halfway through the meeting, after realizing that he was nothing more than a film extra in what could be regarded as a B- Rated gangster movie.

The meeting was a three-hour rant, mostly in a Japanese slang usually used by Yakuza mobsters. Pickens himself was shouted down and his encourage insulted by “Sokaiya” acting at behalf of Koito. But apparently, also Mr. Watanabe transferred some Koito shares to “Sokaiya” in order to take on and mock the company president.

Picken’s Défense: Mixing Up Business and Politics

Back in Texas Pickens decided to up the ante. Unfortunately, he mixed political ambitions (it was an open secret that Pickens was toying with the idea running for the governorship in Texas) with the important cause of defending the rights of minority shareholders in Japan.

He started lobbying American lawmakers, while simultaneously launching an aggressive media campaign in which he attacked the arrogance, insular mentality and the self. entrenched interests of corporate Japan’s business elite in particular, and the uneven playing field in bilateral economic relations between the U.S. and Japan in general.

At a time when Japan Inc. was engaged in numerous high-profile acquisitions in the U.S., and Japan bashing at its height, Pickens’s campaign initially fell on fertile ground.

His complaints were endorsed by 18 members of the U.S. House of Representatives, and the U.S. Federal Trade Commission launched an investigation into possible antitrust activities of the Japanese automotive Industry.

Pickens Losing the Fight

Several legal, political and economic circumstances would eventually conspire against Pickens. Firstly, the Iraq invaded Kuwait in 1990 and political priorities in the U.S. changed abruptly.

Secondly, the Japan bubble finally popped, sending Pickens’s position in the Koito stock under water. In addition, a legal battle to force Koito to hand over its tax returns failed.

Finally, a new Japanese law forced Pickens, still fulminating about his mistreatment at the Koito shareholders meeting, to make public his financial arrangement with Mr. Watanabe, which might reveal that Pickens was not the true owner of the Koito stake.

Initial US press coverage was favourable to Pickens’s campaign taking on corporate Japan. But with more detailed information about the dubious and murky business relationship between Pickens and Mr. Watanabe, support ebbed.

As his stake in Koito fell further in value, he sold it in June 1991. The buyer was Mr. Watanabe. A confirmation that the Japanese was the puppet master behind the scenes all the time.

Months later, Watanabe announced the intention to sell the Koito stake to a Swedish-American investment group, but the deal fell through. By this time, all of Mr. Watanabe’s investments were turning sour. But his rumoured connections with the Yakuza made banks cautious about pulling the plug.

In 2001, Watanabe was arrested by Tokyo police on suspicion of obstructing compulsory seizure of assets by creditors.

Could Pickens Have Won?

Some observers of the battle between Mr. Pickens and Koito claim that the outcome could have turned out differently if Pickens had only put-up real money, intent and long-term commitment. That in Japan it takes more than fourteen months to develop the trust that is required to become an insider.

If Pickens only had held Koito stock for several years, had learned basic Japanese business etiquette, had shown a continuous interest in the firm and had demonstrated that he had something to offer, surely, he would have been invited to become a board member eventually.

I regard such assertions as naïve. With the benefit of hindsight, it turned out that Pickens was the wrong person at the wrong time for lecturing corporate Japan basic principles of shareholder activism and rights.

The arrogance and hybris of Japan Inc., and the flaws in its corporate governance structure, were perceptible and would unravel, not in years but decades following the “Pickens Affair”.

With Pickens, Japan Inc. had its first Barbarian at its gate. The Japanese establishment successfully managed to fend- off the first attack of a foreign "corporate raider" or "hostile activist"

In the decade after T. Boone Pickens tried to engage with corporate Japan there were no large-scale shareholder activist events. In the early/ mid 2000s foreign activism in Japan saw a little renaissance.

Again, corporate Japan barked and chased them off. But the price paid, not only for shareholders, but the entire country, was sky high and is mounting.

Corporate Japan: Thirty Years On

Three decades after the defeated campaign by Pickens, the fall out is still felt. Activities by foreign investors are often viewed in suspicious light within Japan. At the same time, foreigners are highly sceptical about Japan’s willingness to change its corporate governance for good.

A lot has changed since Pickens took on corporate Japan. With the dismantling of cross hold shares since the Japan bubble popped, the Keiretsu corporate structure has been in retreat. Most shares disposed by Japan Inc. were bought up by foreigners, holding roughly 30% of listed Japanese companies.

But not only Japan Inc.’s shareholder register saw a reshuffling, also its balance sheets. Since the mid 1990’s, corporate Japan has added 400 trillion Yen in cash and cash equivalents to its current assets, while simultaneously reducing interest bearing debt.

Granted, since the onset of Abenomics in 2012/ 2013 pay- out to shareholders has increased on an absolute basis, with dividends and share repurchases hoovering around an all-time high.

But it is not enough! Balance sheets in aggregate remain insanely inefficient. The net financial position of Japanese companies (non- financial) turned positive in 2014 and kept increasing till 2018 where it has been stagnating ever since.

The trend has been facilitated by a highly conservative accounting system (J-Gaap) that enables corporate officers to understate the true earning power of the underlying business.

The cost of corporate Japan’s (irrational) financial conservatism is not only felt by foreign shareholders, mainly in form of inadequate pay- out ratios and extended undervaluation of their holdings.

More importantly, it is Japan as a whole that gets hurt most. It is high time the Japanese understood that still 70% of publicly listed companies are owned by themselves. The costs of corporate Japan’s conservatism are numerous, like limited business investment, foregone corporate taxes, rising risk of precarity for workers and retirees, to name just a few.

Final Remarks

More worryingly, a number of Japanese officers are getting involved in self- dealings. Trying to take private abstrusely undervalued companies at inadequate prices. An undervaluation that has been brought into existence by the very same people in the first place. Enriching themselves at the expense of the shareholders, the true owners of the company.

It is high time that Japan had a debate like the one in “Anatomy of a hostile takeover”. Tackling and settling once and for all issues concerning: Who are the real owners of publicly listed companies in Japan and what are their legitimate rights? Furthermore, what is the role of shareholder activism and hostile bids and takeovers in Japan? How should a transformation of Japan’s market of corporate control look like? And last but not least, what is the purpose of corporations in Japan, e.g., shareholder primacy or stakeholder primacy?

Source and Reference:

Anatomy of a Hostile Takeover - Annenberg Learner (Video)

Microsoft Word - 05_Anatomy.doc (test-learnermedia.pantheonsite.io) (Transcript)

Pickens Reveals Source of Stake (oklahoman.com)

Shareholders' Rights in Japan (escholarship.org)

Pickens's Japanese Battle Becomes a Trade Issue - The New York Times (nytimes.com)

Friend or foe? Corporate scandals and foreign attempts to restructure Japan | The Asia-Pacific Journal: Japan Focus (apjjf.org)

PICKENS' KOITO PLOY SHAKES UP JAPAN (afr.com)

Koito-Pickens-Toyota Case - Law Essays (lawaspect.com)

NEW PICKINGS WILL BE LESSON FOR T. BOONE - Deseret News

T. Boone's Tokyo Campaign - TIME

A Pickens Drama, Far From Texas - The New York Times (nytimes.com)

T. BOONE TAKES ON TOKYO - The Washington Post

Understanding Stakeholder Capitalism, Its History, and Relevance (investopedia.com)

25 years ago: Driving back the raider at the gates of Goodyear Tire and Rubber Co. - cleveland.com