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, case studies take a look at how corporations use corporate governance to improve their value, and in this installment 3.3, how they respond to turmoil. That includes challenges from shareholders to the management team and hostile takeover actions. The real-life examples of successes and failures 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 3.3, the 16th segment of the book:
Will Class Shares Be Established in Japan?
In July 2015, Toyota Motor Corporation issued class shares. Having obtained 75.21% approval for this decision at the general shareholders meeting in 2015, Toyota amended its articles of incorporation to make it happen.
This "Class AA share" is very uncommon in the world. What is unique about it is that the share is "capital-safe." Transfers are restricted for a period of five years upon acquisition. But after that, such class shareholders can either convert their shares into common shares or get the company to buy their shares at the issue price. This means that as long as Toyota remains existent, the shareholders will suffer no loss, no matter how much the market price decreases.
However, regarding these class shares, some argue that the company "intends to gather such shareholders who are favorable to the management," using the catchphrase, "capital-safe," as bait. There were pros and cons among the proxy advisory firms, too.
Nevertheless, considering the fact that the issue price was set 30% higher than the current market price of the common shares, the shareholders who had acquired such class shares could not expect to benefit by converting them into common shares, unless the market price considerably increased. Even if Toyota's operational results drastically worsened, such class shareholders were not allowed to escape by selling their shares for five years.
Shareholder Oversight and the Hand of Activists
If they could not escape, they had no other choice but to do oversight. They could hold Toyota to account for its management, going hand-in-hand with activists.
This is exactly what Toyota targeted. The top executive was committed to striving for mid- and long-term growth. It can be hailed as a great step forward to respond to the Corporate Governance Code, which encourages the mid- and long-term improvement of corporate value.
There are many companies, including Google LLC, that employ class shares in the United States. They are not yet widely spread among Japanese corporations. However, Cyberdyne Inc, which was founded by the University of Tsukuba as a venture company, issued class shares accompanied by more than one voting right, but went public issuing only its common shares in 2014.
Will class shares be established in Japan? We need to pay close attention to how the issuance of class shares will work for Toyota, a leading company in Japan.
(The Asahi Shimbun dated July 2015)
Looming Crises of Hostile Takeovers
The boom of hostile takeovers is on the horizon.
How has such a movement come about? It is partly attributable to the Corporate Governance Code, one of whose ends is the elimination of cross-shareholding. The number of stable shareholders has decreased, whereas the ratio of floating stock rises. There is also more to it. It is a resonance evoked by institutional investors and activists. Activists claim, "Increase ROE [return on equity], and generate profits." Back in the day, there were stable shareholders in a company who had always been faithful to its management without expressing any dissent. Now, however, the situation has drastically changed.
What is wrong with "lukewarm management" was pointed out by the Japan Economic Revitalization Headquarters of the Liberal Democratic Party in 2013. To deal with such a quandary, the Corporate Governance Code was produced. Making ROE higher is the best way to improve capital efficiency.
Those who are more aggressive in trading offer to buy shares even by placing a higher premium on the market price. It is not easy, even for institutional investors who are inclined to hold their shares over the mid- to long-term, to find a reason to reject their offers. Japan's Stewardship Code demands that "the interests of beneficiaries behind the scenes be paid attention to."
Movement to Reduce Cross-shareholding
Financial institutions have one after another decided basically not to own cross-shareholdings. There is a movement ongoing for even listed companies to likewise reduce cross-shareholding.
In the United States, in recent years, claims by activists who hold only a few percent stake in companies are beginning to prevail because they are backed by institutional investors. Actually, Yahoo! had started considering selling the shares of Yahoo Japan Corporation, in which Yahoo! owns a 35% stake. There was a sign that Japanese corporations were following suit.
First comes a shareholder return policy, followed by a hostile takeover. No one is found anywhere under the sun to oppose a takeover plan to oust the top executive of a Japanese company who does nothing but just keep resting on his/her laurels.
There is only one countermeasure: to perform such stable management that no one can make it happen.
(The Asahi Shimbun dated August 2015)
Turmoil of Cookpad Inc and ISS
In January 2016, a conflict occurred between the founder and the president over who would take control of the company, whose business is to manage a recipe-sharing site. It was Cookpad Inc, a company listed on the First Section of the Tokyo Stock Exchange. The founder, who was also a major shareholder in possession of about 44% of the voting rights, exercised the shareholder's right of proposal to demand changing the current board of directors, including the president. After that, the proposal that both the president and the founder should remain in their positions was agreed upon as a resolution of the selection of directors. Accordingly, the matter was resolved.
The founder had been critical of the current management policy, which had swerved from the main line of business, and demanded that the management only engage in the main line of business. However, there was an argument that it was difficult to win over the support of many other shareholders for the proposal of the founder. It was also quizzically pointed out that the founder had not revealed any plans about how to operate the company after the change of the management team.
Criteria for Shareholder Proposals
What is worthy of note is that in February 2016, International Shareholder Services (ISS), a leading American proxy advisory firm, stipulated for the first time the concrete criteria regarding shareholder proposals in case conflicts arise over controlling interests. For example, the applicability of management plans and the feasibility of proposals are enumerated as items to be weighed. The mere description of the personal history of a director candidate without manifesting any practical plans would make it difficult to gauge which proposal better serves the interests of shareholders.
Thanks to the guidance of ISS, Japanese leading corporations have been encouraged to employ outside directors. In the future, the criteria listed by ISS will be of great help when conflicts over controlling interests occur in companies where foreign shareholders have a certain presence.
But the problem is not confined to foreign-affiliated companies. The same is also true of domestic institutional investors. Actually, it is said that a proxy advisory firm played a significant role in the exercise of voting rights at Otsuka Kagu's general shareholders meeting in 2015. Likewise, the opinions of a proxy advisory firm became hot topics for discussion at Kuroda Electric Co, Ltd. Therefore, it stands to reason that it would be difficult to obtain the approval of other shareholders for any shareholder proposal without detailed management plans.
(The Asahi Shimbun dated March 2016)
Follow the book from Chapter 1, as it is published.
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Author: Shin Ushijima
