Listed Japan dislikes how investor watchdog looks over its shoulder
Government moves to shine spotlight on shareholder service provider
TOKYO -- Japan's Financial Services Agency this year will begin encouraging large-lot investors to disclose how they voted on each proposal at annual shareholders meetings and the reasoning behind their votes.
The agency is trying to get a handle on the role played by proxy voting services that offer big investors recommendations on how to vote. Listed companies are not always happy with these recommendations.
Nomura Holdings is among them. In early June, the financial company issued a statement disapproving of a recommendation from Institutional Shareholder Services, the world's leading proxy voting service provider, regarding a proposal it was putting to its shareholders. ISS had suggested that its client investors vote against the appointment of Mari Sono, a former employee of Ernst & Young ShinNihon, Nomura's auditor. ISS pointed out that appointing Sono as independent outside director does not meet the service provider's independence criteria, and that the company proposal is an indication that Nomura regularly secures a director's seat for ShinNihon retirees.
According to a source at Nomura Holdings, no such arrangement exists, though a former ShinNihon chief did serve as an outside director of the financial company from 2008 to 2016.
Nomura quickly responded. It released the statement and visited some 40 domestic and overseas institutional investors to persuade them to vote for the proposal.
The nominee retired from the auditor nearly five years ago, the statement says, so "there is no possibility that any conflicts of interest will occur between her work [in the past] and her duties as an outside director of the company."
In the end, Sono's appointment won with 80% of the shareholders' votes.
The conflicts between ISS and listed companies can be attributed to how the service provider systematizes voting decisions.
ISS is the No. 1 provider of proxy voting services, operating in 13 countries. It has established proxy voting guidelines for each country and region. For some 90% of voting items, ISS makes "for" or "against" decisions according to a set of criteria. One criterion might be that return on equity should be 5% or higher. Another could be that two or more outside directors should be on the board.
The Japan unit is believed to have only a handful of permanent employees. They seem to be able to exchange opinions with only 100 or so companies a year. This is hardly enough if individual circumstances are to be taken into account.
Most listed companies in Japan close their fiscal years at the end of March. ISS screens a total 10,000 or so proposals from some 2,000 Japanese companies on behalf of its clients.
With help from temporary employees, the advisory company has to input vast amounts of data every meetings season.
Reports issued to investors are inexpensive, so "the quantity matters," according to ISS Japan chief Takeyuki Ishida.
While ISS is believed to have contributed to improving ROE at Japanese corporations, its automatic, inflexible recommendations system has often been criticized.
"ISS's attitude toward applying its unified criteria to various companies, regardless of industry circumstances and other factors, has raised concerns in the U.S., too," said Yuichi Ozaki, an associate professor at Tokyo Metropolitan University.