Chapter 3.9 Corporate Case Studies, Increasing Value

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 3.9, the author takes on buybacks, takeovers, and other strategies parent companies might use as they attempt to increase corporate value. In all of this, what is the role of shareholders? The author abundantly peppers real-life lessons and examples.

Find all published chapters at 'The Only Way to Survive for Japan'

Read Chapter 3.9, the 22nd segment of the book:

Acquisition of 100% Ownership of NTT Docomo, Inc

Nippon Telegraph and Telephone Corporation (NTT) executed a takeover to acquire 100% ownership of NTT Docomo on November 17, 2020. NTT was going to compulsorily buy out the shares still held by the shareholders who had not yet tendered their shares.

What is of note is that this takeover caused the subsidiary to be delisted. Basically, a conflict of interest tends to occur between a parent company and its subsidiary if both are listed.

The top shareholder of NTT was the Japanese government, which decided to employ a takeover to remedy the situation where both the parent company and its subsidiary are listed. It manifested a strong implicative message of the Suga government for foreign investors. It seemed that delisting of a subsidiary from the stock market was no longer allowed except by way of a takeover.

There is more to it. There is a greater concern that acquisition by a dominant shareholder of its subsidiary will prioritize the interests of the parent company as an acquirer over those of the minority shareholders. The "Fair M&A Guidelines" released by the Ministry of Economy, Trade and Industry highlight that point. Inevitably, the design and adoption of specific and practical measures will be required to ensure that the corporate value will be enhanced and that impartial transactions will be secured.

Getting to a Fair Price

NTT Docomo established a special committee composed of independent outside directors and demanded an increase in the offer price in line with the views of such a special committee. In response, NTT raised the price per share from ¥3,400 to ¥3,900 JPY ($22.24 to $25.51 USD), a 40% increase over the closing price shortly before the announcement of the takeover. This shows how well the special committee functioned. It might have been affected by the news that the offer price in the takeover of FamilyMart Company, Ltd by Itochu Corporation was criticized for being too low.

What remains to be dealt with now is the group governance of NTT. It is still vivid in our memory that deposits had been illicitly withdrawn from the electronic payment service, "Docomo Kouza" (ドコモ口座: literally, Docomo Account). Now that it has become the parent of a wholly-owned subsidiary, it would be easier for NTT to achieve the improvement of overall group governance. Of course, the active involvement of independent outside directors should be required in the process of improving its group governance.

I hope that NTT has the strong determination and gumption to become an exemplary model to promote Japan's governance.

(The Asahi Shimbun dated December 2020)

Playing Down Shareholders and Scandals

At the end of June 2021, Mitsubishi Electric Corporation disclosed its fraudulent quality inspections. It seems that this nonfeasance had continued for more than 30 years. Much to my growing dismay, however, the management team played dumb about it at their general shareholders meeting, despite that they were actually aware of the fact.

The scandal had been unearthed inside the company on June 14, 2021, and reported to the Ministry of Economy, Trade and Industry on June 25. However, management did not mention it at the general shareholders meeting held on June 29. It was disclosed the following day in a press release.

According to Mitsubishi Electric Corporation, after having explained to each director beforehand to the effect that it was not desirable to give an explanation about the misconduct without establishing its probable causes, its executive directors decided against disclosing it at the general shareholders meeting.

Why was a board meeting not held at all to address the issue? The company should have disclosed as much information as it was able to get hold of as of the date of the general shareholders meeting.

It deserves to be criticized that it only reports to the Ministry of Economy, Trade and Industry, which belittles its shareholders. Moreover, it has an ingrained habitual practice of covering up problems. It deserves even more severe censure, for as many as six falsification cases in the quality inspections of the company have been brought to light since 2018.

When the Function of Outside Directors Fails

What were the independent outside directors doing? Mitsubishi Electric Corporation had as many as five independent outside directors. I believe that some of them might have insisted on holding a board meeting.

This series of phenomena would show that the independent outside directors had not been properly functioning. Like Toshiba, Mitsubishi Electric Corporation is also a company with a nominating committee, etc. It has been made clear that Japan's corporate governance would go nowhere if formality overrides practicality.

In September 2021, Mitsubishi Electric Corporation was reportedly going to release the results of investigations conducted by an investigation committee led by an outside lawyer, as well as its recurrence prevention measures. However, its approach, which was different from that of Toshiba, was concerning.

This investigation committee was composed of members nominated by the management. Therefore, I am curious to know what kind of report is going to be produced. I earnestly hope that the outside directors will serve their purpose this time. Preferably, they would become directly involved in the investigation.

It would be difficult for the company to regain its trust unless it shows the attitude of making explanations to its shareholders, not to mention to its customers.

(The Asahi Shimbun dated July 2021)

The Prime Market and Cross-shareholding

The Tokyo Stock Exchange's new board showed that 664 companies failed to satisfy the requirements for inclusion in "the Prime market," the most exclusive top tier. That is about 30% of all the companies listed on the First Section of the Tokyo Stock Exchange.

Listing on the Prime market requires a company to have over 800 shareholders, more than 20,000 units of publicly traded shares, a market capitalization of all publicly traded shares of more than ¥10 billion ($65.4 million), and a ratio of publicly traded shares of more than 35%. This is intended to secure the liquidity of transactions among the many investors and to promote constructive dialogue with investors.

There needs to be a reduction of so-called cross-held shares. The definition of publicly traded shares has been reviewed, the result of which is that cross-held shares are basically no longer counted as publicly traded shares.

Cross-shareholding is a cultural corporate practice unique to Japan. Holders of cross-held shares hardly ever oppose the policies and plans of management, assuming that they can also benefit from the mutual back-scratching relationship. However, this could ruin the chances to put the brakes on top executives, thereby causing corporate value to be damaged.

Expectations for Outside Investors

The Tokyo Stock Exchange considers that listed companies exist for the benefit of institutional investors. Of the institutional investors, foreign investors constitute a prominent part. A drastic expansion of ESG (environment, social, and governance) investment demonstrates how influential foreign investors are.

It seems that the Tokyo Stock Exchange expects much of foreign investors. This is demonstrated by its attitude that the Prime market-listed companies should not be Japan's blue-chip companies unless they are attractive enough to successfully win over global investors.

Those companies that failed to meet the requirements this time will be eligible for a second chance at assessment by submitting subsequent reports. Even if they fail to meet the criteria in the second assessment, it is possible to remain listed on the Prime market through transitional measures. Such transitional measures are valid "for the time being." It should not be long, judging from the enthusiasm of the Tokyo Stock Exchange.

Market restructuring is a trump card for Japanese companies to achieve improvement of corporate value.

(The Asahi Shimbun dated August 2021)

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