The 2016 proxy season was 
widely expected to build on the notable improvements and encouraging trends prompted by Japan’s recent legislative and regulatory efforts to strengthen its corporate governance practice. This was broadly the case as we saw a range of positive developments such as increasing board independence, better disclosure practices, and more transparent oversight. While not the market norm, there were several cases of clear communication and engagement between companies and shareholders having a significant impact on governance issues. On the other hand, familiar problems relating to secrecy, entrenched management, and oversight structures continued to pop up during the season.
As more and more companies adjusted their boards under the new ‘one-tier with one committee’ structure, questions were raised as to whether this shift is truly in shareholders’ interests. While active and foreign investors demonstrated their influence through increased involvement in governance and increased voting opposition, controlling shareholders continued to cause headaches for boards and minority shareholders. Several major companies, and whole industries, were rocked by scandal, with the subsequent fall-out showing that how a board responds to such problems can be as important as the scandal itself – and that leadership structures can have a significant impact on how a board responds.
Our season review provides a handful of Case Studies that illustrate the issues that investors and companies faced within the Japanese market, and what both parties can learn from them, including:
- OPT Holding – A relatively high level of opposition to the company’s new ‘one-tier with one committee’ board structure suggests that shareholders’ appetite for dissent is rising, and that other companies intending to make the increasingly popular shift in board structure should consider preemptively engaging with their investors to explain the decision.
- Cookpad – Internal conflict between the founding director – and 44% beneficial owner – Mr. Sano and the other board members spilled out of the boardroom and into the press, damaging the company’s share price in the process. While an all-out war was averted, the situation highlights the precarious position of boards trying to placate a major shareholder, and questions linger on whether future flare-ups at Cookpad could impact the interests of minority shareholders.
- Seven & i Holdings – The combination of an active investor willing to publicize its concerns and a nomination committee with independent director representation played a critical role in making executive succession more transparent, and in preventing a hereditary transfer of power.
- Toshiba – Despite a complete overhaul of the board and establishment of revitalization plans, repeated revelations of accounting errors and what appears to be a largely cosmetic adjustment raised questions about whether the issues that led to the errors in the first place have truly been addressed.
- Toshiba TEC – Toshiba TEC’s decision to seek shareholder approval on management proposals without being able to release their proxy materials highlighted one of the difficulties minority shareholders face at controlled entities.
- Mitsubishi Motors – For a company with a history of scandalous accounting, the revelation of long standing data falsification was a devastating third strike. Mitsubishi Heavy Industries is out as controlling shareholder, replaced by Nissan Motor in a game changing deal that has shaken up the Japanese automotive industry.
- Suzuki Motor – Despite some prima facie similarities with Mitsubishi Motors’ scandal, Suzuki’s handling of its own data falsification has left a significantly better impression on their shareholders; the differences appear to reflect leadership, risk management, and internal controls.
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Glass Lewis’ season reviews provide market-specific overviews of the key developments in governance, shareholder activism and stewardship, executive compensation and ESG that defined the 2016 proxy season, along with in-depth case studies detailing how these issues played out in practice.