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


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

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  • June 1, 2010
  • Beyond Corporate Governance - What Is Expected of a Company in the Post Financial Crisis Era?

    1. 1. Beyond Corporate 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.
    2. 2. 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 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 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.
    3. 3. TOPICS <ul><li>Current Discussion and Rule Changes on Corporate Governance </li></ul><ul><li>ll. Where Have We Come so far? !(Case 1) Takeover Defenses </li></ul><ul><li>(Case 2) Independence on the Board </li></ul><ul><li>lll. What is expected in Post-Financial Crisis Era? </li></ul>
    4. 4. I. Current Discussion and Rule Changes on Corporate Governance
    5. 5. Discussion at government level has started * Please refer to next pages for topics covered General shareholders’ meeting General shareholders’ meeting 2010 2009 2008 June companies June June Dec METI Report Released * (17/6/2009) March MOJ/ DPJ 2011-12? MOJ-led discussion for company law TSE FSA Report Released (23/4/2009) Rules for Board* and Disclosure (30/12/2009) Report Released * (17/6/2009) Rules for Disclosure (Governance, Cross-Shareholdings, Compensation etc) Report Released (30/6/2009) ? UK Takeover Rule Study Group Public Comments (19/5/2009) Rules for Placing * (24/8/2009) DPJ – draft of new company law for “listed companies” (*Introduction of independence needs to be completed in 2011) General shareholders’ meeting
    6. 6. Comprehensive Topics are covered   TSE (Listing Rules) FSA (FEIL) METI DPJ (MOJ) Main body of discussion Comprehensive Improvement Program for Listing System Financial System Council's Study Group for Strengthening the Competitiveness of Japan's Financial and Capital Markets Corporate Governance Study Group Advisory Committee (Feb. 2010 -- ) Themes <ul><li>Third Party Share Issuance   (Placing) </li></ul><ul><li>Cash-Out via Reverse Stock </li></ul><ul><li>Proxy voting related matters, disclosure of voting results </li></ul><ul><li>Management Buy Out </li></ul><ul><li>(Takeover Defenses / Rights Plans) </li></ul><ul><li>Issues regarding Equity Finance / Capital Raising </li></ul><ul><ul><li>Third Party Share Issuance (Placing) </li></ul></ul><ul><ul><li>Issuance of MSCB (Moving Strike Convertible Bonds) </li></ul></ul><ul><li>Squeeze out of minority shareholders </li></ul><ul><li>Subsidiary Listing </li></ul><ul><li>Governance of Group Companies </li></ul><ul><li>Corporate Governance (Structure of the boards, Independence, Statutory Auditors) </li></ul><ul><li>Executive Compensation disclosure </li></ul><ul><li>Proxy Voting, dialog between investors and companies </li></ul><ul><li>Cross-shareholdings </li></ul><ul><li>(Defense Measures / Rights Plans) </li></ul><ul><li>Corporate governance structure </li></ul><ul><li>Independence of the Board (outside directors and statutory auditors) </li></ul><ul><li>Number of outside directors </li></ul><ul><li>Independence on the board </li></ul><ul><li>Employee Representatives on Statutory Auditors Board </li></ul><ul><li>Group related rules – protection of minority shareholders at parent company on actions at subsidiary level and vice versa </li></ul><ul><li>No subsidiary listing </li></ul><ul><li>Pre-emptive Right (Rights Issue?) </li></ul><ul><li>(M&A / TOB rules??) </li></ul>
    7. 7. II. Where Have We Come so far? (Case 1)Takeover Defenses (Case 2) Independence on the Board
    8. 8. Investors vs. “Corporate Japan” Increase in Foreign Ownership and Decrease in Cross shareholdings Decrease in Foreign Ownership and Slight Increase in Cross shareholdings 2009 ~ Mid 1990’s ~ 2005 ~ 2007 Early 2000’s ~ Mid 1990’s <ul><li>Has Confrontation been eased and Constructive dialog begun? </li></ul><ul><ul><li>Changes in the attitudes of both Corporation and Investors were observed </li></ul></ul><ul><li>Confrontation with activists and institutional investors has been intensified </li></ul><ul><ul><li>Hostile takeover attempts and creeping share acquisitions </li></ul></ul><ul><ul><li>Proxy voting, shareholder proposals, direct communication </li></ul></ul><ul><ul><li>Adoption and Use of Rights Plans (Defense measures) </li></ul></ul><ul><li>Confrontation with activists has begun </li></ul><ul><ul><li>Hostile takeover attempts and proxy fights </li></ul></ul><ul><li>Communication with institutional investors </li></ul><ul><ul><li>IR activities </li></ul></ul><ul><li>Response to “Sokaiya” shareholders (Corporate Mafia) </li></ul>FINANCIAL CRISIS <ul><li>Corporate Governance Rule Changes </li></ul><ul><ul><li>Are rules (substantial and disclosure) comprehensive enough? </li></ul></ul><ul><ul><li>Do rules serve the purpose? What were to be changed? </li></ul></ul><ul><ul><li>Dilution caused by Equity financing / large scale public offering </li></ul></ul>Investors coming back to Japanese Market? ~ 2008 NEXT step for Japanese companies is to gain investor confidence
    9. 9. (Case 1) Takeover Defenses <ul><li>Newly adopted: 224 companies </li></ul><ul><li>Shift from Trust Type Rights Plan: 1 company </li></ul><ul><li>Cancellation: 3 companies </li></ul><ul><li>Newly adopted: 131 companies </li></ul><ul><li>Shift from Trust Type Rights Plan: 2 companies </li></ul><ul><li>Cancellation: 3 companies </li></ul><ul><li>Newly adopted: 206 companies </li></ul><ul><li>Shift from Trust Type Rights Plan: 1 company </li></ul><ul><li>Cancellation: 9 companies </li></ul>About 5% of all listed companies About 10% of all listed companies About 15% of all listed companies <ul><li>Newly adopted: 22 companies </li></ul><ul><li>Shift from Trust Type Rights Plan: 5 companies </li></ul><ul><li>Cancellation: 22 companies </li></ul>eAccess Shiseido WORKS APPLICATIONS MORITEX ROHM Riken Vitamin EZAKI GLICO Aderans Holdings… June June June June June More and more companies drop takeover defense measures
    10. 10. (Case 2) Independence on the Board <ul><li>Minimum standards for governance would help to recover investor confidence . </li></ul><ul><li>Change in governance may deter problems/scandals to occur. </li></ul><ul><li>Independent directors may be well positioned to understand and monitor the long term policies of companies such as R&D which is necessary for sustainable long term growth. </li></ul><ul><li>Independent directors should act for the interest of minority shareholders who are not represented by anyone otherwise . </li></ul><ul><li>Statutory Auditor system serves its purpose, but their authority is limited (no voting right at board meetings, etc) </li></ul><ul><li>The role of outside directors is not to give opinions and advice based on industry specific expertise . </li></ul>Supporting Opinion <ul><li>Corporate governance should be left to the decision of each company. </li></ul><ul><li>Chance in governance structure does not enhance corporate performance and could not prevent financial crisis in US . </li></ul><ul><li>Directors in Japan , inside or outside, are not working solely for minority shareholders but for all stakeholders , and outside directors are not be motivated to work for them. </li></ul><ul><li>Statutory Auditors provide monitoring function through their participation in the board meeting in their capacity to “audit” the legality of the board action, including the discharge of fiduciary duties. </li></ul><ul><li>Outside directors without industry specific expertise can not give sound business advice to the board as expected . </li></ul><ul><li>Why should governance issues be prioritized in the face of financial crisis ? </li></ul>Dissenting Opinion <ul><li>Expected roles of independent directors perceived by corporations and investors (and among investors) are not the same. </li></ul><ul><li>Independence from the management/executives in order to protect minority shareholders by solving conflict issues? </li></ul><ul><li>e.g. Stance towards hostile takeover, Activation of poison pills, MBO/Privatization, Listed subsidiary </li></ul><ul><li>Advice to the management on compliance and financial (cost of capital, dividend / repurchase policy) to minimize downside risk? </li></ul><ul><li>Advice to the management based on industry and technology to increase value of the company and to maximize upward return? </li></ul><ul><li>Independence either on Board of Directors or Statutory Auditors is required >>> should the same role be expected? </li></ul><ul><ul><li>                                </li></ul></ul>
    11. 11. (Case 2) Independence on the Board <ul><li>How can we make it work? </li></ul><ul><ul><li>                                </li></ul></ul>Cases in which the activation of Rights Plans was deliberated at “Independent Committees”   Independent Committee Plans adopted / activated by Outcome Hokuetsu vs. Oji Paper (2006) Yes (3, non-business related) No outside directors Board Independent committee recommended to activate the plan . Board decided not to issue rights but undertook &quot;private placement&quot; Bulldog vs. SP (2007) N.A. Shareholders (after tender offer was launched) Shareholders approved the activation and the dilution was caused . SP received cash as economic compensation. Sapporo vs. SP (2007 ~ 2009) Yes (3 from business and academic) Outside directors present Board ⇒ Shareholders After Q&A period (8 months) and board examination period (2 months), Independent committee and Board concluded that SP would cause damage to shareholder value (2008). SP withdraw takeover proposal, and Renewed rights plan was approved by shareholders(2009). ※ Renewed rights plan approved by shareholders in 2009 has a provision to limit the time for Q&A and board examination period. Toyo Denki vs. Nidec (2008) Yes (3 from lawyer, academic and outside statutory auditor) No outside directors Board On the closing of Q&A period (3 months) and before the start of board examination period, Nidec dropped its proposal.
    12. 12. III. What is Expected in Post-Financial Crisis Era?
    13. 13. <ul><li>Corporate governance through capital market mechanisms has been recognized as a &quot;means&quot; to ultimately enhance shareholder value. </li></ul><ul><li>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. </li></ul><ul><li>Unfortunately, compliance with these rules is sometimes seen as more of an &quot;end&quot; than a &quot;means&quot;. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>