How can the CEO of a 1.2 trillion yen company (13 billion USD!) can get blackmailed and forced to quit at the whim of one or two old cronies on his board? To put this in perspective, despite being a truly global company with a strong international brand name, Fujitsu is the 40th largest company on the Tokyo Stock Exchange. While I knew that Japanese companies have never really taken the concept of corporate governance on-board, I had thought that at least the top one hundred listed companies in Japan would have had some understanding of fiduciary duty.
Over the weekend it has emerged that Nozoe Kuniaki (野副州旦), the financially savvy president of Fujitsu, who “resigned due to health reasons” (病気療養 byoki ryoyo) back in Sep ’09 was actually blackmailed into resigning by Akikusa Naoyuki (秋草直之), another former president of the company. note: Akikusa is famous for destroying 91% of shareholder value during his five year reign at the top of Fujitsu and blaming it on his employees who “don’t work hard enough”.
Perhaps it is more fitting to use the word “coup.” At 8:30AM on Sep 25, 2009, Thirty minutes before their regular directors meeting was scheduled to start, Nozoe was summoned into a small room by Akikusa and Mazuka Michiyoshi (間塚道義), the man to be elected as his replacement ninety minutes later. Nozoe was told that they had dirt on a company that he had close dealings with and so he must retire immediately. In the press conference later that day, the new president told the press that Nozoe had asked permission to focus on his health (取締役会の前に直接、治療に専念したいため社長の職をまっとうできない) but that he couldn’t discuss the details as they were private. The financial world watched as Fujitsu’s share price lost over 12% in the following two weeks as they waited for a better explanation. None came. Nozoe wasn’t seen again at the company again (despite remaining an “advisor to the board”) nor did ever hold a press conference. All a bit of a surprise for a man who promised to deliver Fujitsu’s highest historical profit only three months earlier and was deemed to have a perfect bill of health at his regular check-up at St. Luke’s Hospital.
The stock plummeted for good reason. For the first time in over a decade, the market had liked what it was hearing from Fujitsu’s president. Even though Nozoe was only at the helm of Fujitsu for 15 months, the stock outperformed NEC, their closest competitor by 25% because he was willing to make courageous decisions to make Fujitsu a viable company in the 21st Century. But as is quite often the case, what is loved by the share-market is not always popular amongst staff. His smarter (but internally despised) moves include:
- Selling Fujitsu’s perpetually loss making HDD business to Toshiba and it’s HD media business to Showa Denko (Feb 17, 2009).
- Trying to merge Fujitsu’s semi-conductor business with NEC Electronics. (NEC Electronics shunned them to chose Renesas to partner with instead). Instead Nozoe chose to outsource production to Taiwan’s TSMC (April 30, 2009). This made over 2,000 Fujitsu jobs redundant.
Both of these businesses have been a drag on the bottom line for almost a decade that neither Akikusa (president 1998-2003) nor Hiroaki Kurokawa (黒川博昭, his direct predecessor: president 2003-2008) had the courage to pull the plug on. In fact both former presidents were famous for being soft on the management in these two divisions who knew that if they bowed their heads deeply and asked politely for one more chance that they would never be turned down. By contrast, Nozoe was economically rational, quick to move and wasn’t shy about it. Apparently on the day of the sale of the HDD business he was walking around saying that the head of the division had “gracefully committed suicide” (潔く腹をかっさばいたな) by refusing to focus on profit.
While the sale of these two huge divisions were the most controversial, during his short time he also managed to merge several other problematic subsidiaries (which had become popular havens for “retired” Fujitsu managers) and came close to selling Nifty (their internet provider subsidiary). While he’d be praised for his decisiveness in the States, this doesn’t win you any friends in Japan. Low and behold, it turns out that Nozoe spent a significant time in America when he personally took charge of a significant patent case that the company was fighting against IBM.
Unfortunately, the concept that a company is solely owned by its shareholders just does not fly in Japan. Corporate law states that a company is to be run for all of its stakeholders (including employees, customers, etc etc) and that is often interpreted to mean everyone but shareholders. Clearly this guy has been stabbed in the back by unhappy employees after he made some difficult decisions in the interest of the company that jeopardised a few fat pay checks. If that had happened at the mid-management level then it would be slightly more understandable, but the fact that such crass politics can be allowed to impact the choice of CEO of a listed company is worrying. Surely the board has fiduciary duties to protect the long-term interests of the company (for both share holders and employees) and not the short term interests of a few disgruntled senior citizens?
The questions that this drama has brought up do not stop there. What sort of corporate governance exists in a company where a failed former CEO can remain on the board for seven years after he supposedly retired? It wouldn’t surprise me if this was a family run company and the Don of the family was lingering behind the scenes but Akikusa certainly is not that. In fact Akikusa – who has been sitting on the Fujitsu board for an amazing 22 years! – only owns 15,000 shares in Fujitsu (not even US$100,000 worth!). Surely that in itself states pretty clearly that Fujitsu doesn’t believe in aligning senior management’s incentives with shareholders. While there isn’t a huge difference between 21 and 22 years, it is probably also worth mentioning here that when Akikusa “stood down” as Chairman in 2008 he did so claiming that he would only remain on the board for a year to assist the “transition”. Not only has he assisted in firing a talented CEO, he has also somehow managed to continue to control the company for seven years after he stepped down as President. (Please refer to second paragraph for reference to Akikusa’s management ability). Apparently it was Akikusa who “suggested” who the new CEO should be to replace Nozoe in the board meeting that followed the negotiated dismissal.
Of course, this has been all over the news in Japan. While not telling the full story, this news clip gives a brief overview of what happened:
Feel free to add your comments below, but other particular questions that cross my mind regarding the incident are:
- Don’t shareholders have the right to understand the real reasons behind changes in senior management? Shouldn’t the new CEO be punished for blatantly lying to the public post the Coup? (The TSE in fact does have a rule requiring listed companies to explain the reasons behind changes in company representatives (代表権のある役員の移動に関する適切な公表の義務))
- Shouldn’t the entire board be involved in decisions regarding the appointment of the CEO/President of a company? Why wasn’t the issue discussed thirty minutes later in the board room? Fujitsu has four “independent” directors but what monitoring role did they play in this situation? Surely this just supports the theory that “independent” directors in Japan are merely there as a favour to the senior management and have no intention to actually act on behalf of shareholders. (It is even more depressing when you realise that one of Fujitsu’s independent directors is a representative of Fuji Electric who owns a 10% stake in Fujitsu).
- The allegations were that Nozoe had direct links with a company that was a front for the Yakuza. Nozoe claims that there are no links between the company that he had dealings with and the Yakuza and that he was never shown any proof suggesting so of the links. Better yet, it appears that the assumption of guilt was based on a rumour heard from a stock broker. As anyone who has read Tokyo Vice will realise, it is extremely difficult to find reliable information in Japan about which companies really are fronts for the Yakuza but that still doesn’t suggest that acting on hearsay is a way to manage a multi-billion dollar company. Nozoe (through his lawyer) has since requested (Feb 26) that the company give him the opportunity to state his case to the board and also conduct a detailed investigation into the corporate governance standards in the firm. Regardless of the truth, it sounds like a great idea. Surely if the current management was confident in their decision then they should not be afraid of such an inquiry. He also requested that they reinstate him as President of the company. Good luck to him.
- Let us for a moment assume that Nozoe really was connected to the Yakuza. Wow. TSE listing rules clearly state clearly that companies with links to the underworld will be de-listed. That should be an even bigger headline. Could we even go as far as to say that current Fujitsu management was aiding and abetting the links to the Yakuza by not exposing the association?
While Fujitsu has been careful not to go into too much detail in its official announcement regarding the decision (link to English statement here) it seems as though the allegations went something like this:
- Nozoe was pushing the company to sell its stake in Nifty (www.nifty.com – their internet provider subsidiary).
- The favored buyer, was a company run by a close acquaintance of Nozoe (this itself is a huge conflict of interest if you ask me but perhaps that is a little more acceptable in Japan Inc.)
- A broker that Fujitsu had dealings with suggested that there may be some “reputational risk” involved with a fund that may have invested money in the potential buyer. (Reading between the lines this means that the buyer was a front for the Yakuza and was channelling black market cash into the acquisition via an investment fund.
- The first time this situation was explained to Nozoe he agreed to cease negotiations with that party, but for some reason allowed the same close acquaintance to continue to be involved in the transaction.
- The board members who staged the coup felt that this was not in the spirit of the “Fujitsu Way” and hence demanded his resignation at the same time as insinuating that if he did not resign immediately, Fujitsu would definitely be de-listed.
- Five senior managers who were staffed on the Nifty case were immediately fired or demoted following the coup.
To be clear, even the company’s official explanation (the new one) states that Nozoe did not do anything illegal. So far the stock price has failed to react very much to this news (-3% the day after the announcement). What does this mean for Fujitsu shareholders? If the company is really only -3% worse off then does that mean that investors never really did expect that corporate governance standards were being met even at such a large company?