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Retail investors channel inner activist with proposals

Pronexus advises companies how to hold shareholders meetings at a seminar.

TOKYO -- Retail investors are acting more frequently on their right to make proposals at shareholder meetings, putting executives on edge and prompting efforts to crack down on frivolous suggestions.

Stick it to management

Those attending Toyo Tanso's general shareholder meeting March 30 will be asked to consider two director-appointment proposals: one brought by the company, and the other submitted by an investor holding 46,000 shares -- just 0.2% of the total.

     The graphite and carbon materials producer plans to shake up top management through a vote at the shareholders meeting as part of business rehabilitation. While the shareholder proposal is unlikely to pass, the company was stunned when it was submitted. "This is the first time we've had a shareholder proposal," an administrator said.

     Investors holding at least a 1% voting stake or 300 votes in a Japanese company are eligible to make proposals at shareholder meetings. Toyo Tanso offers shares in units of 100, making 30,000 shares the minimum.

     The National Council of Corporate Affairs, or Zenkabukon, said two shareholder proposals have passed in the past seven years. One case was in 2009, when Aderans Holdings -- now Aderans -- came to loggerheads with U.S. investment firm Steel Partners Holdings over director appointments. The firm filed its own director proposal, which triumphed over Aderans' in a proxy battle at the shareholder meeting.

     "Even if [shareholder proposals] are not ultimately adopted, 30-40% approval can be an effective means of keeping management in check," attorney Wataru Higuchi said.

Gaining influence

When the proposal system was adopted in 1981, shareholder meetings were dominated by racketeers often associated with organized-crime gangs, giving retail investors little chance to be heard. Shareholders' new powers "felt more like rights to pose questions than to make actual proposals," said Rikkyo University professor Hideyuki Matsui. Social activists proposing utilities abandon nuclear power and investors seeking increased dividend payouts were among the first to use the system to seek real change.

     Proposals from ordinary retail investors have come in more frequently of late. "A number of retired baby boomers have begun to invest and have become cognizant of their rights as shareholders," President Shiro Terashita of IR Japan said, noting that some have management experience. A total of 34 companies received shareholder proposals ahead of such meetings at the end of fiscal 2014, 50% more than five years earlier.

     Companies that receive proposals must decide whether to bring them up for discussion. Because Japanese corporate law protects the right to make proposals, "rejecting them out of hand raises the risk of a court battle," said the lawyer Higuchi.

     "We recommend companies that have received proposals from shareholders consult with a lawyer," said Naoji Ito, executive officer at investor relations consultancy Pronexus.

Serious suggestions only

Proposals to change a company's articles of incorporation are the most common type raised for discussion at shareholder meetings, totaling around one-third of such items at the end of fiscal 2014.

     But proposing frivolous changes is not unheard of. Nomura Holdings in 2012 discussed 18 shareholder proposals at its general meeting, including one to change the title of the director position and one that would have made all toilets the Japanese-style squatters. All these measures were voted down, but examining proposals and notifying shareholders was still a burden for Nomura.

     The Tokyo Stock Exchange is urging listed companies to shrink their stock trading units. The Ministry of Justice, meanwhile, is seen creating a legislative council as soon as 2017 to revise Japan's corporate legislation. Zenkabukon plans to recommend the council toughen standards for who may make proposals, such as requiring a higher share of voting rights; require proposals to be made earlier; and limit the number of proposals that can be submitted.

     Yet placing limits on an important tool for dialogue between shareholders and companies will require cautious and deliberate discussion, particularly in light of Japan's corporate governance code introduced in 2015.

     "Shareholder proposals are a powerful means of checking the influence of corporate directors," and a decision to restrict them should not be made lightly, said Oki Matsumoto, chairman of Monex Group. "What exactly constitutes an unreasonable proposal needs to be discussed and defined."

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