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 this installment of Chapter 3, he introduces management decisions to delist companies and the impact of short-term investor tensions. The author abundantly peppers the lessons with 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 3.4, the 17th segment of the book:
Emergence of Short-selling Funds
Foreign short-selling funds have made inroads into Japan's stock market. Short selling involves borrowing shares from a securities company, selling them, and purchasing the same number of such shares again when the stock price falls and returning them to the securities company, thereby obtaining the difference as profit. The short-selling funds benefit from the use of such a short-selling method in their investing.
On July 27, Glaucus Research Group, an American short-selling fund, published a report strongly recommending selling shares at the target price of ¥631 JPY ($4.13 USD), half the closing price of the previous day. Their recommendation was based on the allegation that Itochu Corporation had falsely inflated profits in its past financial statements.
Likewise, in August 2016, Citron Research, an American financial analysis firm, alleged that the stock price of Cyberdyne, Inc was overestimated. It published a report on August 15 that the target price should be ¥300 ($1.96), over 80% lower than the closing price just before the publication.
Consequently, immediately after the release of the report, the stock price of Itochu temporarily dropped by about 10%. Meanwhile, the stock price of Cyberdyne temporarily fell by close to 30% a week after the publication of the report.
Watching Out for Misinformation
Provided that such reports had no reasonable grounds and the short-selling funds were aware of it, that behavior would have constituted the spreading of rumors prohibited by the Financial Instruments and Exchange Act. Itochu and Cyberdyne were reportedly considering taking countermeasures, including legal actions.
Glaucus, however, explained its grounds in detail over 44 pages in its report. It also pointed out that there was little chance of its action constituting the spreading of rumors. Furthermore, it was suggested that Glaucus had discussed possible legal issues beforehand with Japanese lawyers. Meanwhile, Citron may have possibly misunderstood the obtained information. Therefore, further investigation of this matter was required down the road.
These short-selling funds are not uncommon overseas. In the future, published reports on other Japanese corporations similar to these reports are expected. I would like to pay close attention to the movements and development of short-selling funds in the future.
The media should also be discreet and take proper responsibility for reporting such movements and developments.
(The Asahi Shimbun dated September 2016)
Preferential Treatment for Long-term Shareholders
An increasing number of corporations have started adopting shareholder special benefit plans. According to "Kaisha Shikiho" (会社四季報: Japan Company Handbook), the number of listed companies that have employed such plans hit a record high of 1,310 as of the end of August 2016. What is worth noting is that the number of companies that preferentially treat the shareholders who have held their shares for the long term under such plans reached as high as 257.
Hasegawa Company Limited, which deals in family Buddhist altars and accessories, changed its plans in 2016 to give special benefits only to the shareholders who have held more than 100 shares of the company continuously for over one year. That same year, Link and Motivation Inc, a business consulting firm, also started adopting preferential treatment for shareholders who have held its shares for the long term.
What is the story behind this? It reflects a company's countermeasure against the short-termism of investors who only seek short-term interests. Shares are shares because they can be sold at any time. While it is true that short-termism helps invigorate the market, oddly enough, no one speaks favorably of it. The Corporate Governance Code does not encourage it, either.
Toyota's Response
Even though a company is striving for mid- and long-term management, if its shareholders support short-termism, the company's efforts will turn out to be pie in the sky. The top executive will continue to be at the mercy of quarterly financial results. Toyota Motor Corporation issued a class of shares in 2015, which was considered to be a response by management to such short-termism, which targeted long-term management.
Meanwhile, there is an argument that any plan to preferentially treat long-term holders of shares may generate a sense of unfairness in other shareholders. The companies are obligated to contribute to communities as public institutions of society. For that purpose, shareholders are also required to have mid- and long-term perspectives.
The increase in corporate value over the long term will also be reflected in the short-term corporate value. It follows that the management based on mid- and long-term perspectives will also serve the interests of short-term-oriented shareholders. Therefore, from this point of view, it cannot be said that preferential treatment would cause unfairness among shareholders.
I think that it is more important to consider the idea of giving more voting rights to long-term holders of shares. The investors who are against it should manifest in their own right how they can contribute to their companies over the mid- and long-term.
(The Asahi Shimbun dated October 2016)
Delisting
Aderans Company Limited announced that it would implement a management buyout. After the MBO happens, the founder, Mr Nobuo Nemoto, concurrently serving as chairman and president, and Mr Yoshihiro Tsumura, vice president, would acquire a 50.1% combined stake, and the rest would go to Integral Corporation, an investment fund. The company was due to be delisted.
Behind this story is the company's bitter experience that a large number of its shares were owned by Steel Partners Holdings LP, an American investment fund, since 2004. In the selection of directors in 2009, Steel Partners' shareholder proposal was passed. After that, plans were only in pursuit of an increase in sales and profits without any mid- and long-term perspectives being promoted. That caused confusion in management.
Learning from that failure, the company decided to implement the MBO for the purpose of exerting all efforts to strengthen its management structure without being affected by the vicissitudes of the stock price.
Overcoming 'Short-termism'
Delisting helps a company break free from the pressures of short-termism in the capital markets and makes it easier to drastically restructure its business operations in line with its long-term perspective. This is exactly the benefit of delisting.
The number of listed companies in the United States is now half as many as it was 20 years ago. Nowadays, it is often the case that listed companies such as Dell, a leading American technology company, decide to go private. One of the reasons why American listed companies choose delisting is that they will be able to reconstruct their businesses based on their long-term perspectives.
On the other hand, an investment fund that becomes a majority shareholder through an MBO will enhance its influence, whereby the company may have a risk of being deprived of its freedom in management. Aderans suggested to Integral that the founding family retain a majority of the shares and obtained approval from Integral. Such a play would be planned to reduce the risk.
Delisting is just the outset of management reconstruction, and how a company promotes the reform of its business operations after delisting matters a great deal. I am greatly interested to know whether the movement of Aderans will turn out to be a good example or a bad example for other listed companies.
(The Asahi Shimbun dated November 2016)
Follow the book from Chapter 1, as it is published.
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Author: Shin Ushijima
