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. But are all corporations subject to governance rules, or just ones that are listed on the stock exchange?
In this last segment of Chapter 3, the author uses case studies to explore what good governance means, even if a company delists or was never listed on the exchange. His lessons 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 3.10, the 23rd segment of the book:
Governance in Unlisted Companies
The year 2021 saw record-high cases of management buyouts (MBOs). This was partly due to the restructuring of the market divisions of the Tokyo Stock Exchange, which imposed the soaring costs of continued listing on companies. After the restructuring, additional financial burdens, including compensation of outside directors, were inflicted on those companies that remain listed.
In recent years, many guidelines, such as the Corporate Governance Code, have been established and revised. These revisions invited listed companies to improve their governance. Meanwhile, the higher the level of governance that is demanded, the greater the burden the companies have to endure. That made some companies reconsider remaining listed because they could not benefit much from continued listing.
If a company delists, it will no longer be subjected to such established and revised guidelines. It follows that delisting could cause Japanese companies to swerve from the purpose of improving their overall governance.
Then, what should be done to deter this?
Governing Responsibly Even When Delisted
One way is to raise the attractiveness of continued listing. This could be realized by reducing the cost of continued listing or enriching support systems to help companies abide by the Corporate Governance Code. There must be some way to make these happen.
Another option is to promote the corporate governance of unlisted companies. This could be realized by encouraging unlisted companies to employ outside directors, disclosing their non-proprietary information such as management philosophy and management strategies, and establishing and disclosing their process to determine the compensation of directors.
Basically, unlisted companies are also among joint-stock corporations. Therefore, it is a matter of course that unlisted companies should also be inspected for their corporate governance.
A stunning majority of Japanese companies are unlisted. Previously, it was in the news that Hayashibara Co, Ltd, had gone bankrupt without any audit by financial auditors, despite that such audits are required for big companies.
Irrespective of the status of being listed or unlisted, improving the quality of governance decidedly requires self-awareness, knowledge, and efforts on the part of the top executives. They have to respond swiftly to whatever arises from delisting so that their governance does not go unattended.
That said, however, the self-awareness, knowledge, and efforts of the company owners and top executives are not the only factors that are counted on for the improvement of corporate governance.
(The Asahi Shimbun dated January 2022)
Shareholders' Proposals and Dialogue with Shareholders
There is an increasing number of cases in which companies are compelled to introduce takeover defense measures because of conflicts between companies and their major shareholders.
Zojirushi Corporation announced that the company would oppose the election of two outside directors proposed by Ace Frontier Limited, its shareholder and an investment fund, at its general shareholders meeting of February 17, 2022. It also revealed its plan to introduce takeover defense measures.
What are their respective claims? Ace regarded Zojirushi's management structure, where the founding family, including the president, owned more than a 30% stake, as problematic. The problem followed the ordinary general shareholders meeting in 2020. At that time, Ace proposed electing one outside director so that any director except the president might make decisions independently of the president.
In response, Zojirushi elected an outside director other than the candidate proposed by Ace. However, Ace, concerned that the current structure would hobble the company's future growth, again proposed electing the above-mentioned two outside directors in order to promote and realize its global strategies.
Meanwhile, Zojirushi accused Ace of having brought up this proposal out of the blue without any prior dialogue. Is that a reasonable accusation, I wonder?
Respect for Each Shareholder
If there is any proposal from a shareholder, irrespective of his/her intention or process, the company should respond seriously, paying due attention to its shareholders, especially institutional investors. The company is required to explain its ideas and plans carefully to prevent a great number of investors from agreeing with the shareholder's proposal.
When the company finds a certain rationality in what the shareholder proposes, it should try to have a dialogue with the shareholder and give a proper response accordingly. Zojirushi added one outside director to its board in response to the proposal by the shareholder mentioned above.
Even though there is a shareholder holding more than a 30% stake in the company, as long as the company remains listed, the top executive can no longer expect protection through cross-shareholding. Such days are long gone.
Conversely, a company should take advantage of any proposal from its shareholders as an opportunity to deepen dialogue with its shareholders, thereby seeking to improve its governance.
(The Asahi Shimbun dated February 2022)
Follow the book from Chapter 1, as it is published.
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