Fujitec: driving positive change through active engagement

January 2023 - Asset Value Investors

As stewards of our investors’ capital, we believe that a strong focus on corporate governance is essential. We want to make sure every company we invest faces appropriate levels of scrutiny and accountability, which comes through both public and private company engagement. This engagement is bespoke, not only covering corporate governance, communication and capital efficiency, but strategic and operational issues specific to each company.

 

Where necessary, we will work to ensure companies are being managed in the best interests of their shareholders, offering them proposals that help to grow the business and increase the share price. We find the likelihood of achieving meaningful progress is greater if we present management teams with proposals that are clearly in the company’s best interests.

 

Going the extra step with Fujitec

Our public engagement campaigns have helped to raise awareness around various governance issues and have been a valuable engagement tool. This has proved to be the case with Fujitec, one of the holdings in the AVI Japan Opportunity Trust. Founded in 1948, Fujitec manufactures, installs, and maintains elevators and escalators. While the company has a global presence, 90% of its profits derive from Asia, where it is well established. Over half of its profits relate to after-sales services. We have been active shareholders of Fujitec since July 2018 and, across all AVI funds, we currently hold over 2% of its shares.

 

In May 2020, we launched a public campaign that highlighted several strategic and governance issues at Fujitec. We published a presentation on how to improve Fujitec’s corporate value titled  “Taking Fujitec to the Next Level”. This presentation included recommendations such as suggesting Fujitec perform a thorough strategic review of the business to address low profitability, commit to divesting its ‘strategic holdings’ in other listed companies, and improve overall governance by recruiting experienced independent directors.

 

Operational improvements increased shareholder value

Following that campaign, Fujitec undertook numerous improvements that we supported, including the abolishment of an anti-takeover measure, improved disclosure, enhanced shareholder returns, and efforts to standardise production. These positive actions were well-received by investors generally, and we believe led, at least in part, to a significant rise in Fujitec’s share price.

 

However, we still had questions relating to the company’s board of directors and lack of independent oversight. These issues came to a head in 2022. Another institutional investor, Oasis Management Company, raised legitimate concerns about decades of related-party transactions that had fallen short of good corporate governance, as well as abuses of power by former Fujitec president Takakazu Uchiyama and his family.

 

Falling short on governance

Compounding these concerns, at Fujitec’s 2022 Annual General Meeting (AGM), the Company withdrew the motion to reappoint Takakazu Uchiyama as president just one hour before the vote, although he was allowed to continue leading the company as an honorary chairman, despite shareholders – including AVI – not voting for his re-election. This raised concerns over the credibility of Fujitec’s board of directors, given its failure to hold Mr Uchiyama to account.

To underline our concerns, AVI’s CEO, Joe Bauernfreund, made the following public statement: “Fujitec has defied the voice of shareholders and circumnavigated the AGM voting process to appoint former President Takakazu Uchiyama as Chairman. This flies in the face of the efforts by the Tokyo Stock Exchange, the Government and regulators to enhance corporate governance…As a long-standing shareholder, we have had many fruitful discussions with Fujitec representatives over the past years, but we are alarmed by recent developments. Shareholders cannot stand by idly while they are being ignored. We are proactively evaluating our next steps.”

Active engagement is a gradual process
At AVI, we actively engage with the management of the companies we invest in to sustainably grow corporate value and unlock shareholder value. We have seen much success with Fujitec, as evidenced by the actions they have taken and the subsequent share price increase and re-rating.

 

Active engagement requires patience and is a long-term commitment. There is still more work to do, as demonstrated by the recent actions of the Fujitec board. We still support Fujitec in becoming a best-in-class elevator and escalator company focused on Asia, after-sales services, and technology, and still believe the best way to do this is by holding its management to account.