Chapter 3.2 Should There Be Corporate Preferential Treatment for Long-term Investors?

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, how should the Stewardship Code guide businesses and investors? Where are the conflicts, and what is the role of shareholders? The author abundantly peppers the lessons with real-life case studies 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 3.2, the 15th segment of the book:

Dialogue Over Mid- and Long-term Investments

The Japanese-style Stewardship Code is highly expected to promote mid- and long-term investments. A constructive and purposeful dialogue between investors and companies is expected to greatly contribute to eliminating issues arising from insufficient dialogue, which has been regarded as a hindrance to mid- and long-term investments.

In addition, even in "the meeting of intellectuals regarding the development of the Corporate Governance Code," it was debated how a company can disclose its information to investors. The shrinkage of the information gap will help promote the dialogue.

Although I said it like that, I think that if a company really wants to stem the trend of short-term-oriented investors and secure mid- and long-term investments, it should seriously consider offering some form of preferential treatment to investors who are long-term holders of shares.

In this respect, from October, Daiwa House Industry Co, Ltd reportedly will provide financial incentives to employees who have held its stock for the long term at a rate depending on the number of years of shareholding. It is noteworthy. The company was going to consider offering preferential treatment of some kind, even to its non-employee shareholders who have also held its stock for the long term.

What About the French System?

As is well-known, Japanese companies widely adopt shareholder special benefit plans. The recent noticeable tendency is that over 10% of the companies give some form of preferential treatment to long-term holders of shares.

In France, there is a system in which more than one voting right is given to the shareholders who have held shares for the long term. In Japan, the Companies Act stipulates that the shareholders of a joint-stock company must be treated on an equal basis. I just wonder whether this "non-negotiable principle" is working as a ball and chain. If long-term investments are valued, the adoption of the French structure should be considered.

In the process of the latest revision to the Companies Act, the adoption of the idea of preferential treatment was debated for the shareholders who hold shares for the long term. However, it was not made a reality. It is high time that a drastic reform was implemented to legally support the idea of preferential treatment for shareholders who hold shares for the long term as a growth strategy.

(The Asahi Shimbun dated October 2014)

Interests of Shareholders Over Family Feuds

A top stockholder who was also the founder of the company put up a fight against the then-current management team, and a scramble for proxies started. It was Otsuka Kagu, Ltd.

The founder was the father, and the present president was his natural daughter. It must have been an entertaining show for outsiders to watch. Even the media was releasing news about it almost out of mere curiosity.

However, Otsuka Kagu, Ltd is a listed company. A feud between father and daughter is of little importance. What matters is the fact that the father, though the founder, is just one of the minority shareholders. In fact, the company's shares are held by a number of shareholders. Any side that wins over the majority of the shareholders takes control. Concretely speaking, it means a majority of the board of directors. If a dispute arises in the course of selecting directors over obtaining the support of shareholders, the present title of president does not have decisive meaning.

The dispute seemed to have originated from the dismissal of the president.

A Family Game of Corporate Chess

Chairman Katsuhisa Otsuka, the founder, fired his daughter, President Kumiko Otsuka. Concurrently, the founder assumed the post of president. However, after that, conversely, he was forced to resign from the position of president and was relegated to chairman. It was a coup d'etat by his daughter, Director Kumiko. Of course, other directors also sided with her.

In response, the father launched a counterattack by exercising his shareholder's right to propose to the effect that the present president, Kumiko, be removed from the board of directors.

The party supporting the present president, namely, the company, continuously tried to persuade the father to withdraw the proposal. However, the father showed no sign of compromise. Therefore, it was decided that a slate of directors with Kumiko at the top would be presented to the coming general shareholders meeting as the company's proposition.

At the general shareholders meeting of March 27, both sides were set to clash. To be more exact, I should instead say that the shareholders would decide with which side to entrust the management.

Either the founder or the present president is considered to be harmful to sustaining the company's corporate value. The shareholders were not obligated to choose either of them. They could choose to support neither of them because the interests of the shareholders carry the most weight.

(The Asahi Shimbun dated March 2015)

The Future of Anti-takeover Devices

The general shareholders' meeting season came around in 2015, too. Attention was immediately focused on Capcom Co, Ltd. In 2014, the continuance of the company's anti-takeover measures was voted down. It was recorded as the first case in Japan. And in 2015, the revised version of the company's anti-takeover measures was presented to the general shareholders' meeting.

In 2014, many of the foreign shareholders, who altogether held a 37.3% stake in the company, were against the anti-takeover measures. A takeover by "someone unfavorable to the top executive" may be one by "someone favorable to the shareholders." The foreign shareholders were cautiously worried that the top executive might possibly use the anti-takeover measures as a means to protect himself/herself.

This was not confined to Capcom alone. However, it was noticeable that companies with a higher foreign shareholding ratio demonstrated a lower rate of approval for their companies' anti-takeover measures, even though they were not voted down.

Dealing With Hostile Takeover Risk

Ironically enough, companies that have a higher risk of hostile takeovers were facing difficulty adopting or continuing their anti-takeover measures. How could they deal with this quandary?

The hint lies in the Corporate Governance Code. The Code stipulates that the board should carefully examine the necessity and rationale of its anti-takeover measures and provide sufficient explanation to shareholders.

The mere explanation of the nature of the anti-takeover measure would not fully convince shareholders. They need to be convinced of its necessity through a dialogue with institutional investors. What is important is that the current management should firmly declare and explain its determination on how to manage the company.

After the anti-takeover measure was vetoed in 2014, Capcom expressed its desire to engage in constructive dialogue with stakeholders. I wonder how far the company has promoted dialogue with the shareholders over the past year? The result was made clear at the 2015 general shareholders meeting.

It mattered not only to Capcom, but the result of Capcom was likely to have a direct effect on the movement of hostile takeovers in the future.

(The Asahi Shimbun dated June 2015)

Follow the book from Chapter 1, as it is published.