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 3.8, the author examines the ethical positions of stakeholders. Should outside shareholders in a hostile takeover ignore the interests of employees, customers, and the larger community? Who is a stakeholder? 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 3.8, the 21st segment of the book:
The COVID-19 Crisis and Activists
The COVID-19 crisis revealed changing old and new activism in Japan and helped select which better suits a new era.
Old activism advocated the policy of using a company's assets as capital for dividends or stock buybacks through the power of its shareholders. The purpose was to sell the shares at high prices, thereby seeking to realize short-term profits. New activism, however, uses the opportunity presented by the establishment of the Corporate Governance Code or the Stewardship Code. It encourages a company to head toward the enhancement of its corporate value in the mid- to long-term through constructive dialogue with its shareholders.
Because of the COVID-19 pandemic, many companies have become cash-strapped. Klaus Schwab, executive chairman of the World Economic Forum, reportedly said, "It is irresponsible for a company to continue to buy back its own shares or to pay excessively high compensation to the management team in such extremely trying times."
Mr Schwab also said, "The COVID-19 crisis would serve as a litmus test for checking which company is actually imbued with stakeholder capitalism."
Stakeholders as Clients, Employees and Communities
Stakeholder capitalism is not "shareholder first." It emphasizes clients, employees, and communities. Of course, it eliminates old-world activists. Above all, it weighs sustainability in the long term. This was noted by Mr Akira Kiyota, CEO of Japan Exchange Group, Inc. He said, along with the coronavirus pandemic, "We are beginning to see the world incrementally departing from the shareholder-first policy."
Lopsided demands for shareholder returns, only seeking stock buybacks or dividend increases, will no longer receive support from the market. Therefore, corporate governance will be making its way to stakeholder capitalism. On the occasion of the coronavirus pandemic, new activism targeting mid- and long-term interests is permeating Japan, whereby Japan's corporate governance promises to develop still further.
There is no room left for old-world activists or for their contrivances. What is most important is the monitoring of management that will function flexibly in a new era.
(The Asahi Shimbun dated June 2020)
Delisting and Governance
There is an increasing number of companies choosing a management buyout (MBO) during the coronavirus pandemic.
If a company executes an MBO, it will be delisted, which leads to the loss of shareholder governance.
Of course, because a company is delisted does not mean that it is allowed to be unconcerned about its governance and compliance. This is clear from the case of Yoshimoto Kogyo Co, Ltd. Taking the nature of a company into consideration, stakeholders remain important for the company even after it is delisted. No company stands without employees, clients, and local communities.
Why are joint-stock companies allowed to exist at all, given the privilege of limited liability? It is because they are expected to serve communities ー concretely speaking, the interests of their stakeholders. This should hold true without regard for the organization's size.
What should be done? It is best to let stakeholders monitor the company. Even if a certain shareholder has 100% ownership of the company, he/she cannot get his/her own way in managing it.
Practical Considerations for Monitoring the Company
But the necessity of monitoring may differ in degree according to the size of the company and how influential it is in its communities. However, practically speaking, it is difficult for stakeholders themselves to monitor the company.
Therefore, it is argued that a company of a certain size and social influence should have a watchdog. It is desirable to employ such a watchdog from outside the company, totally independently. Hence, independent outside directors are necessary without regard for whether the company is listed or unlisted.
This makes sense. The Companies Act also requires a company of a certain size to have a financial auditor. Analyses of scandals involving unlisted companies, such as Hayashibara Co, Ltd, should inevitably tell us which company is required to have such a duty.
It is assumed that companies are allowed to exist by communities. Privilege entails responsibility ー without due discussion over this, MBOs may go unchecked. I may not be the only person who harbors such a reservation.
(The Asahi Shimbun dated July 2020)
Majority Shareholders and Hostile Takeovers
Colowide Co, Ltd, successfully acquired Ootoya Holdings Co, Ltd, by means of a hostile takeover.
Not only the employees of Ootoya, but also the customers of the Ootoya restaurants had been against this transaction. Ootoya's obsession with the taste and quality of food, which it insisted on maintaining by cooking in in-restaurant kitchens, was highly appreciated by its employees and customers. But hostile takeovers only care about shareholders. This was clearly shown in the statement of Mr Kenichi Kubota, then-President of Ootoya: "It was the decision of our shareholders. We have no choice but to accept the result."
However, I wonder if it is really allowable to let it pass that way, while acknowledging that it is a joint-stock company. If you own the majority of voting rights, you have a controlling interest in the company. However, is it allowable to ignore the interests of the employees, customers, and local communities?
Colowide, though it is the majority shareholder and succeeded in the takeover, has only about a 47% stake in Ootoya. Who cares for the interests of the other shareholders?
Paying Attention to the Community
The tendering shareholders received a gain on sale, but the shareholders who did not tender their shares or the other stakeholders would be unhappy. "If you were not happy with the result, then you should have tendered your shares." Does this add up? I suppose that such a takeover could possibly lead to impairing corporate value in the mid- and long-term.
Colowide now takes control of Ootoya. Of course, the company would embark on reforming the management of Ootoya. Nevertheless, I just wonder if Colowide, having less than a majority of the shares, will be able to justify its plan to force through reforms that could significantly affect stakeholders and corporate value.
The stock price may be all that matters to Colowide. However, the interests of the other shareholders and stakeholders, including its employees and customers, are at the mercy of Colowide. If it errs in its management, it would not only cause a loss to Colowide itself but also impact the lives of many people concerned.
The case of Ootoya suggests something of great significance in the sense that it matters to the fundamental system of joint-stock companies, whether listed or unlisted.
(The Asahi Shimbun dated November 2020)
Follow the book from Chapter 1, as it is published.
RELATED:
- The Only Way to Survive for Japan: Table of Contents
- Scuttled Seven-Eleven Deal Offers Lesson in Takeover Defense
Author: Shin Ushijima
