Shareholder activism has become more common in Japan in recent years. The introduction of the Stewardship Code in 2014 and the Corporate Governance Code in 2015 raised the bar for improved capital efficiency and corporate governance. Shareholders were expected to be more proactive in holding companies to task.
Historically, this hadn’t really worked so well in Japan, given that many companies had stable shareholders who always supported management through cross-shareholding. Although the level of allegiant shareholdings is slowly declining, it remains high compared with other developed markets. The CGC applies pressure on companies to disclose their policies for the reduction of cross-holdings and this is slowly chipping away at the wall of allegiance.
Additionally, the behavior of institutional investors is under greater scrutiny with the disclosure of voting records for each individual agenda item. With many activists are making proposals that are designed to align with ‘better’ governance, it is difficult for institutional investors to cast a vote against these proposals without conducting some level of analysis.
As a result of the changes, the number of shareholder proposals has been rising. A study by White and Case found that 54 Japanese companies faced shareholder proposals in the June 2019 annual meeting proxy season. The number of companies has increased for each of the past three years, with 40 companies in 2017, 42 in June 2018, and 54 in 2019. Only 12 companies faced shareholder proposals from institutional investors, up from 10 in the prior year.
The success of such proposals, requiring a majority of votes to pass, has been relatively small. However, many companies are also settling proposals before they become public by, for example, announcing stock buybacks or making greater effort to improve board independence and diversity, hence avoiding a public showdown.
The legal bit
A shareholder of a public company who owns, consecutively for the preceding six months or more, at least 1% of the voting rights of all shareholders in the company (or at least 300 votes) may submit a demand to directors, up to 8 eight weeks prior to the day of the general shareholders meeting: demand directors to present proposals as an agenda at the general shareholders’ meeting (Article 303 of the Companies Act); and demand the directors to describe the summary of the proposals in convocation notices of the AGM (Article 305) . The number of proposals that each shareholder can make is limited to ten, that regards demanding the directors to describe the summary.
Japan’s 2020 Proxy Season
Until the Corona virus struck, we would have been expecting another record breaking season for shareholder proposals, including significant support for activists’ and other dissident proposals. However, that seems unlikely to transpire now – whether that is due to the rather mundane issue of trying to obtain legal advice, or whether there is a more philosophical aversion to extracting value from companies at this time. Having said that, there is no fundamental reason to relinquish the quest for better governance.
So far, we count fourteen proposals that have been delivered to companies for upcoming general meetings.
Takeda (4502)
Takeda received a proposal from 11 shareholders representing 0.13% of the voting rights. The shareholders propose Mr. Takeshi Ito (concurrently a director of Azbil Corp and Logos Capital Partners) to the board as a member of the Audit and Supervisory Committee. The shareholders point to below-average ROE and total shareholder returns under the tenure of President Weber.
Takeda opposes this proposal given that the fully independent nomination committee has already recommended four candidates for the ASC. The board is happy that it has the right mix of experience, industry knowledge and qualifications.
We believe that the shareholder proposals will get short shrift at the AGM. Takeda screens very well on our corporate governance metrics and is in the top 5% of large Japanese companies. The board is highly independent with over two-thirds independence ratio and a separate, independent board chair. The board is also highly aligned with minority shareholders with a clear and transparent board remuneration policy - 40% fixed salary, 60% variable share-based compensation. Takeda also operates a ESOP program for senior management.
Shinsei (8303)
Shinsei received a shareholder proposal from Dalton Fund. The fund proposes its own founder, Mr. Rosenwald III, to serve as an independent outside director. The proposal is a long-running attempt to accelerate the repayment of public funds. If elected, Mr. Rosenwald would seek to implement a ¥45b share repurchase, shrink non-profitable assets and align board compensation more closely to the share price.
Shinsei reject the proposals believing that its proposed board of seven (including 5 independent directors) is sufficiently independent to supervise management. The company will introduce a restricted stock compensation plan for outside directors (up to ¥60mn in total). The board also passed a resolution for the acquisition of up to 20.5m treasury shares (8.88% of outstanding) through March 2021.
In common with other banks, Shinsei scores well on our governance model. The same proposal was laid out in a detailed presentation last year, which received 16.6% of support. The key difference this year is that J.C. Flowers and funds have largely excited their position in the bank. This may have put more stock into the hands of foreign institutions that would be supportive of an acceleration in buybacks.
Mitsubishi Logistics (9301)
Mitsubishi Logistics received a shareholder proposal from Oasis Investments. The activist investor calls for 1) acquisition of treasury stock, 2) appointment of two directors, 3) transition to a company with committees and 4) abolition of advisors. Not surprisingly, the company rejected all proposals.
Oasis certainly has the moral upper hand on this one. Mitsubishi Logistics ranks among the bottom 5% of all large cap companies. Its board is unwieldly; entrenched; lacks diversity and independence; and is poorly aligned with minorities. Mitsubishi Logistics’ own slate of independent directors (just four out of 14) hardly inspire confidence. Two of the directors hail from the Mitsubishi Group and two of them have previous violations against companies while they were sitting directors. There is much that could be done to improve the board.
Oasis propose two well-qualified candidates that would help refresh the board and bring in outside logistics experience. The more significant change would be to transition to a company with committees.
Mitsui Mining (5706)
Mitsui Mining received a shareholder proposal (Japanese only) from one corporate holder with 301 voting rights. It could be from a disgruntled ex-employee. There are 10 proposals (the maximum number that the company has to accommodate from each proposer). Many of the proposals are sensible: separating the role of CEO and Chair; greater remuneration disclosure; greater stock ownership for the board. Other proposals call for changes to the articles of incorporation, with rather colorful language and recommendations (the cost cutting idea for saving money on toilet paper is not for the faint hearted). Mitsui Mining ranks in the bottom third of all Japanese companies on our governance screen. With only around 10% of shares being held by allegiant shareholders, management could be advised to listen to some of these proposals.
KIRIN (2503) - An update
Kirin has done a decent job of defining its LT vision in response to Franchise Partners’ proposals. Unlike many Japanese companies, Kirin is not protected by a web of cross holdings. The pros and cons of diversifying into healthcare are debatable, but a diverse and independent board is the best forum for those discussions.
Until now, Kirin’s board has been typical – neither diverse nor independent. In light of the increased scrutiny from activist investors, Kirin responded by proposing 4 new directors – 2 foreign and 2 women. That ticks the right boxes – but governance is more than ticking boxes.
Kirin believes that its slate of NEDs is better qualified, following deliberations by its Advisory Nomination Committee. However, the independence of this committee is questionable, given it includes both the CEO and head of HR.
Kirin’s 4 proposed directors may meet regulatory standards for independence but 3 of them are well-known to the company – Chieko Matsuda has been a member of the Audit & Supervisory Board; Noriko Shiono has been a NED of Kirin Company; and Sir Rod Eddington is the Chairman of subsidiary Lion.
Whether one believes in Kirin's or Franchise Partner's vision for Kirin, everyone should gain from getting the board oversight right.