Cultured Milk, Corporate Culture and Investor Activism in Japan

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Japan’s Yakult Honsha is a company that overseas investors might not be familiar with, even if they know its most famous product, the red-capped probiotic yogurt-like drink sold in many parts of the world.

The company is also an interesting study in Japanese corporate governance and the relationship of midsize listed companies—Yakult has a market capitalization of around $9 billion—with overseas investors. Case in point: its relationship with VGI Partners, a global equity asset management firm based in Australia. VGI owns around 1% of the company, making up around 4.5% and 6% of its global and Asia-focused listed funds, respectively.

It is easy to see Yakult’s promise. Despite existing since the 1930s, it is a trusted brand in an increasingly health-conscious market, with significant room to expand in both China and the U.S.

But it would be difficult to find a corporate-governance drama more emblematic of the occasional frictions between restive foreign investors and traditional Japanese companies.

VGI will vote against the management’s board nominees next month, the youngest of whom is 58. If those nominations succeed, the board will go from having two non-Japanese members—the legacy of a relationship with

Danone

that ended last year—to having none. Other Western investors will vote against the appointments. Calvert Research and Management, for example, votes against any board that isn’t majority independent.

Yakult and the Australian asset manager are also tussling over Yakult’s use of digital marketing, which VGI says would have been the natural and immediate follow-up to recent investments in U.S. distribution. VGI says the company dragged its feet on implementing a marketing strategy. Yakult says it has selected three influencers to promote its products and that the criteria for nomination to the board are a wealth of appropriate knowledge and experience, without regard for age.

There is a perhaps-predictable difference of opinion over shareholder payouts, too. Yakult stresses that it is continually raising its dividends, but VGI would like the company’s payout ratio to move closer to those of the top 10 food and beverage companies in Japan, which sit around 40%.

Yakult released details of its long-term vision this week, but projections for consolidated sales and operating income growth of 145% and 184%, respectively, by 2030 didn’t receive an overwhelming market response. The stock closed down a little more than 4% on Thursday.

What happens next will be interesting precisely because it doesn’t involve a corporate giant like

Toshiba,

where shareholders voted against the re-election of Chairman

Osamu Nagayama

on Friday, a rarity among Japanese companies. Nor does it involve a prominent activist fund like Elliott Management, which would send chills down the spine of any complacent executive.

Cases like the one between Yakult and VGI mean more for the country’s corporate-governance improvements, which in large part will require either proactive relationships with management or the ability of international activists to convince domestic investors of their cases.

Right now, the successes of the Japanese shareholder-focused revolution that then-Prime Minister

Shinzo Abe

ushered in still hang in the balance. Companies like Yakult may well determine the project’s eventual record of success.

Write to Mike Bird at Mike.Bird@wsj.com

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