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Equities

Discipline goes by the wayside as stock rally continues

Minority shareholders overlooked amid easy fundraising environment

TOKYO -- The protracted stock rallies appear to be fueling complacency in markets around the world, causing businesses and exchanges alike to seek easy gains to the detriment of shareholders.

Fund manager Takuya Kamiishi at Daiwa SB Investments increasingly worries about a fading focus on corporate governance.

Companies have revived a trend of raising capital via parent-child stock listing, known here as Oyako Jojo, for instance. This trend can be troubling because subsidiaries of a Japanese company tend to have a strategy that caters to the parent's policies. Yet, SoftBank Group is reportedly considering taking its mobile carrier unit public. 

"Companies that ignore minority shareholders' opinions do not make attractive investments," Kamiishi said.

His sentiment appears to be shared by other investors, judging by the stock performance of the subsidiaries among the parent-child listing pairs. Data compiled by Kamiishi shows that such subsidiaries' stocks delivered lower returns than their parents for the three-year period starting in March 2014.

The trend continues today, as subsidiary companies NTT Docomo, Lawson and Yahoo Japan have been outperformed by the Nikkei Stock Average's 23.1% rise since the start of 2017. Their parents -- Nippon Telegraph & Telephone, trading house Mitsubishi Corp. and SoftBank Group, respectively -- each have a stake of at least 33.4%, which lets the owner veto special shareholder resolutions.

"Companies with controlling shareholders are popular when they are doing well, but if their management goes wrong, addressing the issue would pose a challenge," Kengo Nishiyama at Nomura Securities said. In times of market overheating, businesses have repeatedly raised capital without fully considering minority shareholders. The ongoing rally makes it all the more essential to revisit this risk.

But with the Nikkei average soaring past 24,000 on Tuesday for the first time in 26 years, the protracted bull run has turned big businesses less sensitive toward minority shareholders' interests. This tendency is also observed in other countries as stock prices continue marching upward around the world.

Stock exchanges are also growing more lenient as they compete to attract high-growth, blockbuster businesses.

The Singapore Exchange will allow companies with dual-class shares to list, the city-state's bourse said Friday, with CEO Loh Boon Chye pledging to hammer out rules by March. The exchange, beset by a flurry of delistings from big players, desperately hopes to enhance the competitiveness of its cash-stock market.

The announcement follows a similar decision by the stock exchange in Hong Kong at the end of last year. The Hong Kong bourse's change of heart came after Chinese e-commerce behemoth Alibaba Group Holding had made a record-breaking initial public offering on the New York Stock Exchange, which allows listing of dual-class shares. Rumor has it that Chinese smartphone maker Xiaomi plans an IPO with this structure.

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