Beyond Corporate Governance - What Is Expected of a Company in the Post Financial Crisis Era?
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Beyond Corporate Governance - What Is Expected of a Company in the Post Financial Crisis Era?



Nami Matsuko, Head of Corporate Citizenship Department - Nomura Holdings, Inc. - Japan

Nami Matsuko, Head of Corporate Citizenship Department - Nomura Holdings, Inc. - Japan



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  • June 2, 2010

Beyond Corporate Governance - What Is Expected of a Company in the Post Financial Crisis Era? Beyond Corporate Governance - What Is Expected of a Company in the Post Financial Crisis Era? Presentation Transcript

  • Beyond Corporate G B dC t Governance -What is Expected of a Company in the Post Crisis Era? - Nami Matsuko Head of Corporate Citizenship Department Nomura Holdings, Inc. May 27, 2010 © Nomura Holdings, Inc.
  • This material has been prepared for your private information and reference for domestic use only by Nomura Holdings, Inc. (“Nomura”). Copyright 2010 Nomura Securities, Co., Ltd. All rights reserved. Clients shall independently consult with legal attorneys, accountants, tax advisors etc. upon making any decision related to the contents of this material. The p g y information and opinions contained in this material have been obtained from sources believed to be reliable, but no representations or warranties, express or implied are made that such information is accurate or complete implied, and no responsibility or liability can be accepted by Nomura for errors or omissions or for any losses arising from the use of this material. No part of this material shall be reproduced or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of Nomura. 2
  • TOPICS l. Current Discussion and Rule Changes on Corporate Governance ll. Where Have We Come so far? Did rule changes and shareholder activism drastically change the landscape of corporate governance in Japan? ( (Case 1) Takeover Defenses ) (Case 2) Independence on the Board lll. What is expected in Post-Financial Crisis Era? 3
  • I. Current Discussion and Rule Changes on Corporate Governance 4
  • Discussion at government level has started After a decade of informal discussion, governments have started to seek ways to enhance corporate governance in formal settings. Why Now during Financial Crisis? Now, 2008 2009 2010 June June Dec March June General General General shareholders’ companies shareholders’ shareholders’ meeting meeting meeting (*Introduction of independence Report Public Rules for Rules for Board* needs to be completed in 2011) TSE Released Comments Placing * (23/4/2009) (19/5/2009) and Disclosure (24/8/2009) (30/12/2009) Rules for Disclosure Report Released * FSA (17/6/2009) (Governance, Cross-Shareholdings, Compensation etc) UK Takeover Rule Report Released ? (30/6/2009) Study Group Report Released * METI (17/6/2009) 2011-12? DPJ – draft of new MOJ/ company law for “listed companies” MOJ-led DPJ discussion for company law * Please refer to next pages for topics covered 5
  • Comprehensive Topics are covered From Equity Financing to structure of the boards - what really motivated the changes? Will DPJ make a shift towards stakeholder/shareholder friendly rules and how? TSE (Listing Rules) FSA (FEIL) METI DPJ (MOJ) Financial System Council's Study Group for Comprehensive Advisory Committee Main body of Strengthening the Competitiveness of Corporate Governance Improvement Program Japan's discussion Study Group (Feb. 2010 -- ) for Listing System Financial and Capital Markets Issues regarding Equity Finance / Capital Independence on the board Raising Third Party Share Third Party Share Issuance (Placing) Employee Representatives on Corporate Issuance (Placing) Issuance of MSCB (Moving Strike Statutory Auditors Board governance Convertible Bonds) Cash-Out via Reverse structure Group related rules – G l t d l Squeeze out of minority shareholders protection of minority Stock Subsidiary Listing Independence of the shareholders at parent Proxy voting related Governance of Group Companies Board (outside Themes company on actions at matters, disclosure of Corporate Governance (Structure of the directors and subsidiary level and vice voting results boards, Independence, boards Independence Statutory statutory auditors) versa Auditors) Number of outside Management Buy Out No subsidiary listing?? Executive Compensation disclosure directors (Takeover Defenses / Proxy Voting, dialog between investors Pre-emptive Right (Rights Rights Plans) and companies Issue?) Cross-shareholdings (Defense Measures / Rights Plans) (M&A / TOB rules??) 6
  • II. Where Have We Come so far? Did rule changes and shareholder activism drastically change the landscape of corporate governance in Japan? (Case 1)Takeover Defense Measures (Case 2) Independence on the Board 7
  • Investors vs “Corporate Japan” vs. Mid 1990’s Response to “Sokaiya” shareholders (Corporate Mafia) Increase in Foreign Ownership Communication with i tit ti C i ti ith institutional i l investors t and Mid 1990’s IR activities Decrease in Cross shareholdings Confrontation with activists has begun Early 2000’s Hostile takeover attempts and proxy fights Confrontation with activists and institutional investors has been 2005 2007 intensified Hostile takeover attempts and creeping share acquisitions Decrease in Foreign Ownership Proxy voting, shareholder proposals, direct communication and Adoption and Use of Rights Plans (Defense measures) Slight Increase in Cross shareholdings Has Confrontation been eased and Constructive dialog begun? 2008 FINANCIAL CRISIS Changes in the attitudes of both Corporation and Investors were observed Corporate Governance Rule Changes 2009 Are rules (substantial and disclosure) comprehensive enough? Investors coming back to Do rules serve the purpose? What were to be changed? Japanese Market?? Dilution caused by Equity financing / large scale public offering New types of Investors? NEXT step for Japanese companies is to gain investor confidence 8
  • (Case 1) Takeover Defenses More companies drop takeover defense measures and fewer companies adopt them this year. Japanese type of takeover defense measures was NOT as shareholder-unfriendly as perceived in its structure. What Wh t was wrong? ? How can Japanese companies (re)gain investor confidence? Is it the fault on the side of Japanese companies? About 5% of all listed About 10% of all About 15% of all listed companies listed companies companies Newly adopted: 22 companies y p p Newly d t d N l adopted: 206 companies Shift from Trust Type Rights Plan: 5 companies Shift from Trust Type Rights Plan: 1 company Cancellation: 22 companies Newly adopted: 224 Cancellation: 9 p companies companies Shift from Trust Type Rights Plan: 1 company eAccess Cancellation: 3 Newly adopted: 131 Shiseido companies companies WORKS Shift from Trust Type APPLICATIONS Rights Plan: 2 MORITEX companies ROHM Cancellation: 3 companies Riken Vitamin EZAKI GLICO Aderans Holdings… June June June June June 9
  • (Case 2) Independence on the Board Expected roles of independent directors perceived by corporations and investors (and among investors) are not the same. Independence f I d d from the management/executives in order to protect minority shareholders by solving conflict i th t/ ti i d t t t i it h h ld b l i fli t issues? ? e.g. Stance towards hostile takeover, Activation of poison pills, MBO/Privatization, Listed subsidiary Advice to the management on compliance and financial (cost of capital, dividend / repurchase policy) to minimize downside risk? Advice to the management based on industry and technology to increase value of the company and to maximize upward return and shareholder value? Independence either on Board of Directors or Statutory Auditors is required >>> should the same role be expected? Supporting Opinion Dissenting Opinion Minimum standards for governance would help to recover Corporate governance should be left to the decision of each investor confidence. company. p y Change in governance may deter problems/scandals to occur. Chance in governance structure does not enhance corporate Independent directors may be well positioned to understand performance and could not prevent financial crisis in US. and monitor the long term policies of companies such as Directors in Japan, inside or outside, are not working solely for R&D which is necessary for sustainable long term growth growth. minority shareholders but for all stakeholders and outside stakeholders, Independent directors should act for the interest of minority directors are not be motivated to work for them. shareholders who are not represented by anyone Statutory Auditors provide monitoring function through their otherwise. participation in the board meeting in their capacity to “audit” the Statutory Auditor system serves its purpose, but their authority legality of the board action, including the discharge of fiduciary is limited (no voting right at board meetings, etc) duties. The role of outside directors is not to give opinions and Outside directors without industry specific expertise can not advice based on industry specific expertise. y p p give sound business advice to the board as expected. Why should governance issues be prioritized in the face of financial crisis? 10
  • (Case 2) Independence on the Board How can we make it work? Cases in which the activation of Rights Plans was deliberated at “Independent Committees” Independent Plans adopted / Outcome Committee activated by Yes Hokuetsu vs. Oji Paper Independent committee recommended to activate the plan. (3, non-business related) Board (2006) Board decided not to issue rights but undertook "private placement" No outside directors Shareholders Bulldog vs. SP Shareholders approved the activation and the dilution was caused. N.A. ( (after tender offer was (2007) SP received cash as economic compensation. i d h i ti launched) After Q&A period (8 months) and board examination period (2 months), Independent committee and Board concluded that SP would Yes cause damage to shareholder value (2008) (2008). Sapporo vs. SP (3 from business and Board Shareholders SP withdraw takeover proposal, and Renewed rights plan was approved (2007 2009) academic) by shareholders(2009). Outside directors present Renewed rights plan approved by shareholders in 2009 has a provision to limit the time for Q&A and board examination period. Yes (3 from lawyer, Toyo Denki vs. Nidec academic and outside On the closing of Q&A period (3 months) and before the start of Board (2008) statutory auditor) board examination period, Nidec dropped its proposal. No outside directors 11
  • III. What is Expected in Post-Financial Crisis Era? 12
  • Corporate governance through capital market mechanisms , or shareholder governance, has been recognized as a "means" to ultimately enhance shareholder value. means value In recent years, new rules and regulations for market-driven corporate governance have been introduced in Japan and other Asian countries, albeit with different timetables and content mainly in order to attract foreign investors to the domestic market. Unfortunately, at least in Japan, compliance with these rules is sometimes seen as more of an "end" than a "means". In this post-financial crisis era, re-thinking and re-designing corporate governance in a broader context including an ESG and CSR viewpoint may be a good start for all stakeholders - including shareholders - whose ultimate common goal is enhanced corporate value value. Shareholder-led corporate governance increases its important more than ever in post-financial crisis era since shareholders are best positioned, next to the companies themselves, to urge companies to focus on efficiency and growth, which is the key to the sustainable growth of Japanese companies in post financial crisis era. Caveat is not to let companies to use “stakeholder’s interest” as an excuse to disregard shareholders! Re-definition or Fiduciary Duties on the side of investors and sponsors is also crucial to advance corporate governance which should be the basis for sustainable growth of companies.