Join us in reading Chapter 3 of the book, The Only Way to Survive for Japan, subtitled "Corporate governance is sure to save our country." This book focuses on corporate governance. In Chapter 3, the author sharpens the focus on takeover bids, foreign investors, outside directors and investment decisions. As the issues are explored, they are abundantly peppered with lessons from real-life examples that also serve as a primer on the rules and cautions of corporate governance.
Find all published chapters at 'The Only Way to Survive for Japan'
Read Chapter 3.1, the 14th segment of the book:
The Significance of Relisting
In recent years, there has been a trend toward the relisting of companies that had been delisted from the stock market.
Seibu Holdings Inc (HD) was relisted on the First Section of the Tokyo Stock Exchange on April 23, 2014. Its market capitalization was estimated at around ¥550 billion JPY ($3.6 billion USD). That rivals the other major private railway companies and truly is a remarkable accomplishment.
The investment by Cerberus Capital Management, LP, an American investment firm, which had once been in conflict with Seibu HD over its takeover bid (TOB), came off with flying colors, too. The offering price of ¥1600 ($10.47) per share at the time of listing demonstrates that its prospect has come true.
Cerberus offered the price of ¥1,400 ($9.16) at the time of the TOB in 2013. At the time, though, it received only a small favorable response from the shareholders. However, there is an argument that this was Cerberus's strategy to set a lower limit to the price at the time of relisting. Eventually, Cerberus postponed its plan to sell its shares at the time of relisting. Nevertheless, both Seibu HD and Cerberus can be said to be winners.
Skylark's Delisting-Relisting Case
In 2006, Skylark Holdings Co, Ltd was delisted through the process of a management buyout (MBO), but the company is going to come back to the stock market through the relisting of its shares on the First Section of the Tokyo Stock Exchange in 2014. Its market capitalization was reportedly estimated to be somewhere between ¥350 billion and ¥400 billion ($2.29 billion and $2.6 billion). At that level, it was likely to top the other listed restaurant companies. Bain Capital LP, an American investment firm, owned all of the company's shares. And this also proved to be a fruitful investment.
The process of outstanding achievements by these relisted companies gives us a lot of useful suggestions. I say this because corporations that were once delisted have made actual achievements. They have successfully reconstructed their management and increased their earning power. I figure that through the delisting, they temporarily got away from the pressures caused by the vicissitudes of the market, including the stock price, and were able to pour their efforts into launching a drastic structural reform.
Of course, these relisting cases were backed by the drastic recovery of stock prices thanks to Abenomics. Can this movement be seen as the recovery of Japanese corporations as a whole? This may dictate the future of Japan and will be the main subject of discussion down the road.
(The Asahi Shimbun dated April 2014)
Requirements for GPIF
Stock prices were not attractive in those days. Foreign investors who occupy 70% of the trading value seemed to be losing interest. To counter that tendency, the government was likely to activate the Government Pension Investment Fund (GPIF). The GPIF boasted ¥128 trillion ($837 billion) in assets under management, and even only 8% of AUM exceeds ¥10 trillion ($65.4 billion). For sure, this is expected to be a recipe for success.
But the actual ownership of the GPIF's funds lies in the pension recipients, that is, Japanese citizens. Therefore, if the funds are used for stocks, there is one thing that must be ensured ー the strict adherence to good corporate practices.
When the Olympus Corporation scandal occurred three years ago, there were concerns about adverse effects on pension assets. It was pointed out that there was something wrong with its corporate governance practices, which should have functioned to monitor the top executive and increase its effectiveness. Concerns were reported that foreign investors would be gripped by a frenzy of selling, thinking, "This problem must commonly be ingrained in all Japanese corporations."
But then, the birth of the second Shinzo Abe regime contributed to the drastic rise in stock prices. Unfortunately, however, few Japanese corporations had successfully improved their corporate governance. I suspect that discussion on how to achieve good corporate governance to strive for sound management and strengthen the objectivity of decision-making has remained neglected.
The Abe Governance Effect
Many issues remain to be solved regarding corporate governance, including how to secure highly independent outside directors or to determine compensation for directors, etc. It is not that simple a matter just to copy the same corporate governance of the United States or of other European countries. It sometimes happens that the cure is worse than the disease. This should be prevented. In that sense, Japanese-style management, which values long-term employment, is actually a good strategy, is it not?
It may well be that the GPIF hopes for a rise in the stock price after it buys shares. Therefore, it is inevitable for corporations to demonstrate convincing governance reform, whereby foreign investors will be encouraged to actively buy Japanese stocks.
Meanwhile, the GPIF, which holds the funds of the citizens, should actively work on serving a useful purpose. I hope that stock management by the GPIF will go hand-in-hand with discussion on how to achieve good corporate governance.
(The Asahi Shimbun dated May 2014)
Reasonable Pressure on Corporations
There is an argument that the internal reserves of Japanese listed companies are way beyond the necessary. Even if the corporate tax is reduced, they would put this tax benefit into their pockets, only to add to their internal reserves. This tendency would eventually lead to the inactivity of capital expenditures for M&A or for new business startups.
To counter this, the "Stewardship Code" activity guidelines for institutional investors were introduced. The Code, which originated from the United Kingdom's afterthoughts on financial crises, encourages investors to promote constructive dialogue with corporations. It was a new idea designed to help institutional investors who had failed to sufficiently monitor speculative movements of banks to realize their responsibility as shareholders. To be more exact, it backed them to put direct and reasonable pressure on corporations.
The Code was well-received by institutional investors, for they could avail themselves of more choices. Moreover, corporations were no longer allowed to avoid dialogue with them.
Leveraging Good Governance Into Growth
It was the governmental growth strategy to leverage this Code in tandem with the Corporate Governance Code, the guidelines for good corporate governance. The government intended to use these two strategies to encompass the internal reserves from inside and outside of listed corporations, compress them as if in a vise, and squeeze them out, thereby aggressively allocating them to useful and positive investments. It was truly an ambitious plan.
The Corporate Governance Code was expected in time for the general shareholders meeting season of 2015, and the original plans were made as early as the autumn of 2014. Of course, the proper functioning of independent outside directors was regarded as the linchpin. If they were independent of the management team, they would be expected to oppose the customary practice of saving profits in internal reserves.
It added up. What was next at issue was to determine the appropriate number of outside directors on the board.
Would corporate governance really help improve the business performance of corporations? We were thrilled to see how things would pan out.
(The Asahi Shimbun dated August 2014)
Follow the book from Chapter 1, as it is published.
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Author: Shin Ushijima
