[The Editors' Verdict] How Should We View Private Equity Funds' Involvement in Moral Issues?

Sexual Bribery Allegations Spark Demand for Corporate Investigation
Seen as Serious Breach of Internal Controls
Expectations Rise for Governance Reform and Enhanced Corporate Transparency

Recently, Dalton Investment, an American activist fund, sent a letter urging a fact-finding investigation to Fuji Media Holdings (Fuji HD), the parent company of Japan's Fuji TV, which has been embroiled in allegations of sexual bribery. Subsequently, Dalton took a strong stance by addressing corporate governance issues related to the 'concealment of the truth,' and in its third letter, demanded the resignation of Hisashi Hieda, the representative of the Fujisankei Group, from his director positions at Fuji HD and Fuji TV. Dalton, established in the United States in 1999, is a major shareholder holding 7.19% of Fuji HD's shares as of January.

The incident unfolded as follows. The 'women-related issues' of Masahiro Nakai (52), a dominant figure in the Japanese entertainment industry, were reported, triggering allegations of sexual bribery involving Fuji TV. It was alleged that Fuji TV executives had been forcing female announcers to provide sexual services to Nakai for the past three years. The situation escalated as leading Japanese companies declared a halt to advertising on Fuji TV. Amid this, Dalton attracted attention by sending a letter demanding a 'fact-finding investigation.' Although Fuji TV issued a statement, Dalton sent another letter pointing out serious corporate governance flaws due to the 'concealment of the truth.'

Private equity funds (PEFs) intervene in management activities with the aim of maximizing profits and enhancing corporate value. For example, they improve a company's financial condition through cost structure optimization, divestiture of non-core assets, and introduction of new revenue models. They also exert pressure on management to ensure that shareholder value is not ignored, representing minority shareholders. PEFs provide opportunities to break away from inefficient or conventional management practices and promote innovation. They invest in financially troubled companies and push for restructuring to offer chances for recovery. All these activities are positive.

However, why did the PEF call for a fact-finding investigation into the company's moral issues and point out that this scandal reveals serious governance defects? Instead of questioning the involvement in moral issues, one should look into the underlying context.

Dalton appears to have considered the possibility that this issue arose at the corporate level. They judged that the sexual bribery allegations were not merely individual misconduct but stemmed from the company's internal culture, decision-making structure, or management system. The continuous tolerance or improper handling of such allegations indicates a compromised internal control system, signifying serious governance defects. Failure to resolve moral issues like sexual bribery undermines the reliability of corporate operations and causes loss of shareholder trust. Ultimately, moral issues lead to a decline in corporate value.

The head of a PEF agreed with the author's perspective, stating, "If the person involved in the allegations is a senior executive or decision-maker, it suggests a serious flaw in the company's leadership, and the resulting evasion of responsibility or moral hazard by management connects to corporate governance problems." Dalton also criticized Representative Hieda in its third letter, describing him as a dictator who has exercised complete control and influence over the board for nearly 40 years.

The reason for the critical view of PEF involvement in moral issues is that negative impacts can arise depending on the intent and method of intervention. As PEF influence grows, concerns about active involvement increase, but there is no need to view 'external intervention' with a distorted perspective. Dalton's intervention should be understood as a proactive step taken because the company left the allegations unaddressed or failed to respond appropriately, anticipating ongoing financial losses and reputational damage. Such intervention can be a 'correct' and strong means to improve governance and enhance corporate transparency.