Most executives would blanch when a high-profile figure with whom their company has a close association is arrested on suspicion of insider trading. Shunsuke Takeda, CFO at Orix Corporation, Japan's largest non-bank financial-services firm with revenues of 947.8 bn yen (US$8.13 bn), was no exception. Takeda says that the arrest in early June of Yoshiaki Murakami, a pioneering shareholder activist and Japanese business icon, was "a very large disappointment to us", employing typical understatement: Orix shares fell as much as 12% in one morning when the scandal first broke. Orix had supplied 45% of Murakami's startup capital and still has 20 bn yen invested in the aggressively run Murakami Fund.
Orix, which is perhaps more famous among Japanese in the street for owning a baseball team (Orix Buffaloes of Kobe and Osaka) than for its core leasing and finance businesses, suffered more adverse publicity when a subsidiary managing a real-estate investment trust, Orix JREIT, became the latest in a series of firms to fall foul of Japan's increasingly activist corporate regulators. Japan's Securities and Exchange Surveillance Commission (SESC) in mid-June asked the country's Financial Services Agency (FSA) to impose administrative penalties on Orix JREIT and Orix Asset Management, after the former failed to make adequate assessments when purchasing property for the latter. Orix JREIT's shares fell 7.4% on the news, resulting in the worst day in three years for the Tokyo Stock Exchange's REIT index.
The irony is that maintaining a reputation for excellent corporate governance is at the heart of everything Orix does. Its unique history and ownership structure — with the highest proportion of foreign shareholders of any comparable Japanese company — have helped forge this reputation, as well as encouraged Orix to pursue growth strategies even as many Japanese companies have been focused on consolidation and downsizing. But it seems that, by diversifying rapidly into many different businesses and attempting to shake up Japan's staid business culture, Orix has put its hard-won reputation on the line.
Takeda might seem relatively sanguine about the impact of the Murakami issue, but others see it as big trouble. "The Murakami problem has had a big negative impact on Orix's reputation," says Shinichi Iimura, an analyst with Nomura Securities in Tokyo. On the face of it, there are two problems, Iimura says. The first is that Orix has 20 bn yen in the fund, which brings negative associations given Murakami's admission that he benefited from insider information (albeit unwittingly, he claims). "The second point is that maybe there is a relationship between [Orix chairman and CEO Yoshihiko] Miyauchi and Murakami," Iimura says, alluding to their reputed friendship. If there were a close connection, it could be embarrassing, especially as Miyauchi is president of the government-commissioned Council for the Promotion of Regulatory Reform.
Fighting Sclerosis
Orix is an atypical Japanese organization in many respects. For one, foreign investors own around 60% of its shares — a proportion Ryoji Yoshizawa, an analyst at Standard & Poor's in Tokyo, describes as very high, estimating that a more common level for companies that boast a substantial portion of foreign equity investors runs between 30% and 40%. The high level of foreign holdings makes it certain that non-Japanese owners have strong influence over Orix's corporate philosophy and strategies, and dictate its manner of response to shareholder demands and adherence to corporate-governance standards. In Japan's frequently sclerotic and hidebound business culture, satisfying shareholders' demands and ensuring a high degree of transparency and management accountability are not always dominant priorities.
Press excoriation of Murakami's behavior, even before the scandal gave the media an easy reason to do so, has proved to be a kind of thermometer reflecting the degree of institutional hostility to corporate reform. Even the Nihon Keizai Shimbun, moderately progressive in its economic views, attacked Murakami for his aggressive pursuit of profit maximization, arguing, extraordinarily, that a "true professional" investor must realize that he "cannot win simply by arguing that a company belongs to its shareholders".
As they were both, in their own way, seeking to reform Japanese business culture from within, it was inevitable that Murakami and Orix's senior managers had goals in common, something Takeda readily confirms. "We had sympathy for Murakami's original objective," Takeda recalls. "That's why we put up some seed money for his operations. We assisted Murakami when he started particularly because he had aspirations to improve corporate governance in Japan, and Orix is an advocate of promoting more effective corporate governance." In February this year Orix opted to sell its capital stake in Murakami's firm — doubtless as rumors began to swirl about connections between Murakami and Takafumi Horie, the maverick entrepreneur and chief of the internet investment firm Livedoor, who had been arrested in late January. But with 20 bn yen still invested in the Murakami Fund itself, the connection is closer than Takeda finds comfortable. The whole affair, Takeda rues, is an "unhappy incident" for the development of Japan's corporate environment.
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