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Japan-Update

Japan Inc. faces new age of shareholder accountability

Wuthelam's Nippon Paint proposal could spark a new trend

TOKYO -- As shareholders approach deadlines to submit proposals for annual meetings, one closely-watched resolution crafted by Nippon Paint Holdings' biggest stockholder has the potential to become a test case for corporate governance reform.

Wuthelam, the Singaporean paint-making group, said on Jan. 19 that it will seek to expand Nippon Paint's board of directors to 10 seats during the shareholders meeting slated for the end of March. The business partner of over 50 years is also looking to nominate six candidates to the board.

If a proxy fight does break out, one side would have to secure voting rights in the upper-40% range to prevail. Wuthelam already controls 39% of Nippon Paint. The proposal also has at least one backer in Aberdeen Standard Investments, the British fund manager with a roughly 1% stake. Aberdeen welcomes the motion, since it takes shareholders into additional consideration in terms of governance, said David Smith, the firm's head of corporate governance for the Asia-Pacific region.

Nippon Paint and Wuthelam may strike a compromise proposal before the March meeting. But if the Singaporean group is successful in its bid, it would be the first such victory over a Japanese company with a market value exceeding 1 trillion yen ($9.18 billion). Overall, only a handful of shareholder proposals have passed in Japan in the last decade.  

The subject of shareholder resolutions usually conjures up the image of activist investors demanding dividends or stock buybacks from companies with poor capital efficiency. But even if those activists are right, many other investors would still be resistant to adopting the motion.

"In the end, I feel it would be fine if the proposers would just sell and leave," said an asset manager for a corporate pension fund. And director nominations often stem from founding family squabbles and the like, with true corporate governance almost never part of the equation.

But Wuthelam's case is different. "We are [Nippon Paint's] business partner," said Goh Hup Jin, the executive representing the Singaporean group on Nippon Paint's board. "We will not sell the stock and we will not take over business management." Furthermore, Wuthelam's proposal does not involve any immediate financial gain.

Goh was apparently a detractor in Nippon Paint's failed trillion-yen buyout of U.S.-based Axalta Coating Systems late last year. The resolution appears to be a referendum on the Japanese company's strategy of pursuing big acquisitions.

"The true essence of corporate governance is to prevent harm to corporate value," said Daigo Shimizu at Goldman Sachs.

"I also want to know what growth strategy Wuthelam will formulate," said a Nippon Paint shareholder.

Generally, a stock price rises whenever a proposal arises demanding bigger investor returns. When it comes to director choices, the share price goes up if an equity fund makes the proposal, since it is seen being made under the banner of corporate governance. On the other hand, if a member of a founding family is the originator of such a resolution, investors would shy away in anticipation of what could amount to a ruinous domestic squabble.

For Nippon Paint Holdings, the director proposal has so far turned out to be a blessing. The company's stock has climbed 3% since Wuthelam's resolution came to light, even while the Nikkei Stock Average dipped 3% during the same period.

Elsewhere, textile maker Teikoku Sen-i and GMO Internet were recently subject to shareholder proposals. U.S.-based Xerox agreed Wednesday to a takeover by Fujifilm Holdings after sustained pressure from big investors.

And this renewed governance push by shareholders will likely get stronger yet. Although the investor is not always right, conversations about management objectives are a sign of a healthy business dialogue.

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