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Japan Inc. ain't what it used to be

New rules could make for lively shareholders meetings

TOKYO -- It's as if most of corporate Japan has synchronized their G-Shocks. In March, almost the entire herd closes out its fiscal year. Then in June, most of them conduct their annual shareholders meeting.

These meetings used be nothing more than rubber-stamp affairs. But that is changing, and now some meetings offer opportunities for real dialogue between stakeholders.

And this year's meetings promise to be more meaningful still, now that guidelines on voting decisions have been revised.

The revisions call on institutional investors to disclose how they voted. Management teams, meanwhile, are being asked to more strictly monitor their companies' corporate governance practices.

The revisions are meant to discourage the kind of "friendly" arrangements between group companies that used to be cornerstones of Japan Inc.

The Financial Services Agency in May revised the so-called "Stewardship Code," guidelines meant to nudge institutional investors toward fulfilling their responsibilities to their clients and beneficiaries. A focus of the revisions is to encourage these investors -- which hold large stakes in listed companies -- to explain why they voted the way they did.

Mitsubishi UFJ Trust and Banking was an early adopter. In December, the megabank voted against several proposals at an extraordinary shareholders meeting held by Mitsubishi Motors. The proposals included the appointments of Chairman and President Osamu Masuko as well as four directors.

Nagamori's attendance record

Nomura Asset Management, a Nomura Holdings unit, has disclosed its proxy voting decisions made for companies that held their shareholders meetings during the January-March period. Nomura voted against 8.6% of all company proposals.

There are certain practices that institutional investors smile upon, like having two or more outside directors. Sportswear maker Descente has had one such director but plans to appoint another at its shareholders meeting later this month.

"We spent several years selecting candidates," a company source said, "and we now have the right person."

There are also kinds of conduct that some big investors frown upon, like directors who fail to show up for board meetings. Mitsubishi UFJ Trust, for example, now has a rule to vote against re-appointing directors who are present for fewer than 75% of board meetings.

On this count, Shigenobu Nagamori, a SoftBank Group director as well as chairman and president of Nidec, a maker of electric motors, had to get his act together.

Nagamori had attended 56%, or five out of SoftBank's nine meetings, during fiscal 2015. After that, he and SoftBank pledged to improve.

During the most recent fiscal year, Nagamori, who has been a SoftBank director since 2014, was present for all of SoftBank's 15 board meetings. One reason he was able to make it to all 15 was that SoftBank helped out. The company arranged the meetings to fit the schedules of its busy outside directors.

What do advisers do?

Big investors also don't like anti-takeover measures. They often argue that executives could leverage measures meant to ward off acquirers to protect themselves.

Panasonic in 2005 introduced some poison pills but decided to scrap them three months ago.

It did so largely because management was losing the support of shareholders. The electronics giant was motivated to make the move last June, when 60% or so of shareholders -- far fewer than previously -- voted to re-appoint President Kazuhiro Tsuga. Management then began reconsidering whether it should keep the measures, and repealed it taking the opinions of overseas investors into account.

Kobe Steel, retailer Marui Group and a number of other companies have followed suit. But Seiko Epson, bearing maker NSK and other companies are trying to keep their old boys' networks in place.

Companies that still cling to their anti-takeover measures now must answer shareholders who ask why. Ahead of its shareholders meeting later this month, Seiko Epson printed a booklet and devoted 31 of its 47 pages to explain how its poison pills work. The reading material is meant to gain understanding for management's position.

In another Japan Inc. quirk, exactly what advisers -- typically retired executives -- do perplexes outside parties. Institutional investors criticize companies that still give vague powers to these retirees. Responses from companies are mixed. Railway operator Hankyu Hanshin Holdings and textile maker Nisshinbo Holdings have dissolved these advisory positions. But Takeda Pharmaceutical objected to a shareholder proposal to do the same, arguing that these former bosses do not harm healthy corporate governance.

In reality, a majority of listed companies do not disclose much about the posts, including how much they pay these advisers, nor what the advisers do for their pay.

Regular communication needed

If a company has recently struggled through a slump or faced a scandal, shareholders can form tough crowds at meetings.

For the year through March, shipper Kawasaki Kisen Kaisha posted net losses for a second straight year. Management has admitted to mistakes, like making unnecessarily heavy investments in new vessels. According to a company source, it will use its shareholders meeting to emphasize its commitment to improving both its finances and its earnings by only making essential investments.

Japan Display just suffered through a third straight year of net losses. The company will likely tell investors that it will move into sectors with high growth potential as early as possible.

Internet business DeNA, which operates a website that has been hit by copyright infringement complaints, "could face tough questions [at the meeting]," a company source said. "But we will sincerely keep explaining our commitment to enhancing our compliance practices."

Hidetaka Kawakita, a professor emeritus at Kyoto University, said the revised Stewardship Code will make asset management companies and other institutional investors more strictly adhere to their own voting guidelines. As a result, the rate of "against" votes for company proposals could go up.

Ideally, the need to explain votes could help to promote dialogue between management teams and investors, the professor said. But if investors focus too much on the guidelines, without considering the unique circumstances faced by each company, the channels of communication will be narrow.

What is needed is regular communications between institutional investors and the companies where they park their money -- and for these big investors to clearly explain why they voted the way they did -- Kawakita added.


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