A longtime shareholding on mine, Internet Initiative Japan (NASDAQ:IIJI) [JP: 3774], is having its Annual Shareholder Meeting this Friday in Tokyo. I urge all ADR and Ordinary shareholders to submit their votes as soon as possible, but not later than this Thursday, 10:00 AM Eastern (NYSEARCA:NY) for ADR holders, or by Thursday, 11:59 PM Japan Standard Time for Ordinary shareholders. Please see my previous article detailing my activist work to-date with IIJ.
IIJ hit another 20-month high overnight in Tokyo, up 1.3% to ¥276,900 (ADR equiv. $7.65 at $1/¥90.5), although it traded as high as ¥288,900 in the afternoon session before giving back a good chunk of the gains into the market’s weak close. While IIJ’s stock has had a strong year, I remain convinced that its shares are still undervalued, due in some respects to management’s misuse of capital and the Board of Directors’ failure to unlock value, and in other respects primarily because of overly restrained IT spending in Japan. Those who have followed my activism with IIJ know that less than two weeks ago I responded to IIJ Chairman Suzuki’s response to myself and my fellow shareowner proposal co-sponsor, in which the Chairman informed us that as ADR holders we do not have a right to submit shareholder proposals. Chairman Suzuki did however thank us for our letter and proposals and addressed some matters from each in his response. I strongly believe that the Board has been missing a tremendous opportunity to buyback shares, and it has also failed to help enhance the trading liquidity of IIJ by splitting its Ordinary shares and reverse splitting its ADRs, thus I responded to Chairman Suzuki asking him and the Board to reconsider these two matters in particular and adopt them directly.
This leads me to the four matters for shareholder vote (IIJ proxy materials in PDF) at this Friday’s Annual Meeting — remember that votes need to be in a day ahead of time as I specified above.
1. Appropriation of retained earnings — “FOR” — this concerns the company’s divided payment, which will be increased by ¥250/share to ¥2,250/share (+12%) for the fiscal year-ended March 2010. As I have told Chairman Suzuki, the increased dividend is welcomed, but there is much more that needs to be done for the company’s shareholders in light of the company’s poor returns on capital and its high balance of low-yielding cash (approximately $96 million versus a $606 million market cap) and dubious “other” investments (approx. $29 million of available for sale and non-marketable equity securities). IIJ’s dividend yield is 0.8%. Given that IIJ’s Board does not seem interested in my proposal to pay shareholders a special dividend in light of all of its cash (granted an unspecified amount of cash will be used in its $100 million acquisition of AT&T Japan’s accounts), implementing a stock buyback would be ideal, even for 1% or 2% of shares outstanding. Aside from the authorization of payment of dividends, buybacks are another key way for a Board to steward shareholder value.
2. Election of eight directors — “AGAINST” — unfortunately, at least for the electronic proxy ballot displayed by Broadridge, I only have the option to vote for the eight directors as a group, not individually. If I could vote individually, I would not re-elect Mr. Hiroi or Mr. Tanahashi, neither of whom are reported to own even a single share of IIJ after six years as a director. I take issue with both their tenure and nonexistence of share ownership. I will try and follow-up with Broadridge to see why individual director votes are not available. IIJ’s Board is unnecessarily large compared to the company’s size, and it has too many insiders, but this is a matter that will be addressed at a later time.
3. Election of two auditors — “FOR” — the auditing fees and compensation do not seem unreasonable thus far, therefore I voted “FOR.”
4. Grant of retirement allowance to retired directors and retired auditor — “AGAINST” — IIJ states that “the determination of the specific amount of such retirement allowance, the timing and method of the payment, etc., should be left to the discretion of a conference of the Board of Directors.” Furthermore, it says that “the Company may consider granting IIJ’s shares, currently held as treasury stock, partly in exchange of the above retirement allowance to [...] four company Directors at fair market value.” I don’t understand why retiring, or especially why retired directors, should be granted an allowance of an unknown sum, which may or may not be disclosed to shareholders. Directors are already compensated at the low six-figure level and/or in this case, they are all executive-level insiders. In addition, why give away undervalued equity from a previously well-timed stock repurchase and on top of that not have disclosed any plans to repurchase more stock? I am not a huge fan of buybacks, but when dividend payouts can realistically only be raised incrementally and when a special dividend is not on the table, and further, when a stock is perceived as being cheap and/or having upside, then buybacks of course make sense. Returning excess capital to shareholders rather than hoarding it or squandering it on dubious equity/security or capital investments is the prudent thing for a company to do. In fact, I would be more supportive of pay raises for deserving rank-and-file, which has profound implications internally on morale and externally for the economy, rather than misuse of capital by management.
In closing, when reviewing the IIJ’s proxy materials, I found one noticeable change among the company’s largest shareholders as of March 2010: Goldman Sachs increased its position to 4.2% of shares outstanding from 2.78% it disclosed last September. Otherwise, the top-5 shareholders remain unchanged and very concentrated, with NTT owning 24.9%, BNY Mellon (IIJ’s ADR depository bank) owning 6.6%, Chairman Suzuki owning 6.4%, Itochu Corp. owning 5.1% and NTT Communications owning 5.0%.
I welcome and look forward to hearing from IIJ ADR or Ordinary shareholders.
Disclosure: The author owns shares of IIJ (IIJI) and may own Ordinary shares and/or hold derivative positions at any time.