Highlights from the world of Proxy Papers you can’t afford to miss!
Mizuho Financial Group Inc; Resona Holdings Inc.; UT Group Co. Ltd
Tokyo Stock Exchange – June 23 (Mizuho & Resona), June 24 (UT Group)
In the coming weeks, a number of Japanese companies will contend with a slew of shareholder proposals at their general meetings. Many (but not all) of the proposals promote reforms aligned with international governance best practice. For example, Mitsubishi UFJ Financial Group, TAC Co., UT Group, Mizuho Financial and Resona Holdings, among others, face requisitioned proposals requesting that they adopt governance practices common at North American companies, but rarely, if ever, seen at their Japanese counterparts. Measures including disclosing the compensation awarded to directors on an individual basis (barring a few exceptions, Japanese director compensation is typically only disclosed in the aggregate), and requesting that the outside directors hold sessions without the presence of management and that they appoint an outside chairman. Some proposals have even gone as far as to request the appointment of Lucian Bebchuk, a noted U.S. governance professor, to the board of directors. Western investors may well see merit not just in the reforms themselves, but in the growing use of shareholder proposals to drive the governance agenda; however….
Some of the other shareholder resolutions that have been put forward are, well, problematic, to say the least. Rather than addressing governance, these proposals make several unsubstantiated claims about individuals employed by or affiliated with these companies engaging in illicit relationships with minors and prostitutes. Additionally, the proponent appears to be trying to settle interpersonal disputes with a number of these companies. For example, a proposal at Mizuho Financial requests that the board form a special investigative committee on compliance with respect to “the matter of a woman’s bank account with a balance of over 10 million yen having been frozen at the Shakujii Branch of the Company, the money ultimately being deposited with the Legal Affairs Bureau.” It’s a somewhat bizarre situation, and one that demonstrates the potential power of shareholder proposals both for driving reform – and for abuse.
Standard Life plc & Aberdeen Asset Management plc
London Stock Exchange – June 19 (both)
The proposed tie up between Standard Life and Aberdeen Asset Management has been a long time coming – Standard Life first approached Aberdeen regarding a merger in 2009. At that time Aberdeen opted to pursue its own growth plan instead, however after last summer’s “Brexit” vote, discussions resumed with an eye towards creating a UK investment champion capable of competing globally (and generating hundreds of millions in annual cost savings). It’s widely seen as a good fit between two active managers, with relatively little overlap outside of fixed income and multi-asset funds, and Aberdeen’s portfolio – and emphasis on emerging markets – helping to complete Standard Life’s ongoing transition from insurance to asset management. Moreover, Aberdeen has suffered from consecutive quarters of fund outflows, and both firms have struggled with a global shift away from actively managed funds and record inflows into passive investing strategies, such as exchange traded funds that track market indexes, which has put pressure on the higher fees that asset managers charge. Yet, scaling and synergy benefits notwithstanding, some have questioned the strategic wisdom of doubling down on active management and emerging markets in the current investment environment.
Beyond the strategic rationale, the deal’s structure may prompt questions. Standard Life shareholders will end up with two-thirds of the resulting company, yet otherwise the transaction resembles a merger of equals: the valuation doesn’t offer Aberdeen a material premium despite the effective change of control, and the outsized new 16-person board will be split evenly between the two, with both Martin Gilbert and Keith Skeoch staying on as co-CEOs. It’s an unusual situation, but not that unusual – the recent merger between Henderson and Janus similarly resulted in a co-chief management structure. Moreover, the boards have been careful to clearly explain how a Gilbert and Skeoch team would work together. Less clear is the basis for a hefty £74 million in fees going to a range of advisers on the deal — as is customary for LSE-listed firms, the companies have not disclosed the substantive analyses underpinning this advice or any fairness opinions received on the transaction. However, the toughest questions may concern the domestic fallout from the merger. For one thing, those cost savings have to come from somewhere, and in this case (despite Martin Gilbert’s earlier assurances to the contrary) it appears they’ll be funded in part through redundancies, with 800 workers (roughly 9% of the total workforce) on the chopping block. And, of course, there’s the all-important question of whether the combined company would be headquartered in Aberdeen or Edinburgh.
Mylan N.V.
NASDAQ – June 22
Mylan N.V. certainly found itself in the spotlight in 2016, and not in a good way. In August 2016 news reports began to emerge on the rising cost of Mylan’s EpiPen line of epinephrine autoinjector devices, used in the treatment of severe, potentially life-threatening allergic reactions, from a reported $100 in 2009 for a two pack of devices to approximately $609 in May 2016. The story sparked widespread outrage and accusations of price gouging, with several U.S. Senators calling for investigations. Mylan immediately went on damage control and responded that it was taking action to expand access to EpiPens and announced that its U.S. subsidiary would launch the first generic to EpiPens at a list price of $300 per two pack carton, approximately half of the branded drug list price. Later, in September 2016, CEO Heather Bresch testified in front of the U.S. House of Representatives Committee on Oversight and Government Reform, becoming the latest in a string of drug company leaders interrogated by Congress as public outcry over the rising costs of drugs in the U.S. continues to increase. The company subsequently announced that it had agreed to the terms of a $465 million settlement with the U.S. Department of Justice and other government agencies related to the classification of the EpiPen Auto-Injector for purposes of the Medicaid Drug Rebate Program, but several other investigations regarding EpiPen pricing remain ongoing.
Mylan has recently faced another round of controversy and a “vote no” campaign initiated in May 2017 surrounding the compensation of former CEO and current chair Robert Coury. At the last annual meeting, Mr. Coury transitioned his role from executive chairman to “chairman as a non-employee director.” In connection, Mr. Coury received an eye-popping $108.6M in transition-related payments and benefits, although Mylan states that most of these payments and benefits were approved and/or vested prior to the transition. Still, shareholders may be skeptical of his “non-employee” status, as the board determined that Mr. Coury would receive a cash “chairman’s retainer” equal to $450,000 per fiscal quarter and a single front-loaded grant of 1,000,000 RSUs valued at $43.6 million.
Infosys Ltd.
Bombay Stock Exchange – June 24
Infosys has been among the standard-bearer companies for practicing strong corporate governance in India. Yet, recent developments are raising the question of whether the company still deserves that reputation. In the past few months, a row has developed between founders of the company and the current board over executive compensation and the transparency of the board’s decisions surrounding executive compensation. In April, Narayana Murthy, one of the Company’s founders, published an open letter lambasting the board for a pay raise to the Company’s COO, which followed criticism from him and other founders over a significant payout to the Company’s former CFO, along with generous cash incentives granted to the Company’s CEO. While the founders and the board are apparently in mediation over their disagreements, the Company’s reputation for strong and harmonious corporate governance may have been damaged. What’s done is done; however, the manner in which the board works with or against its founders will ultimately restore or further tarnish what has historically been a sterling reputation for corporate governance among India’s top companies.
Petropavlovsk plc
London Stock Exchange – June 22
Against the backdrop of a long-term downward trend in gold prices and an ill-timed expansion in its leverage, London-based gold miner Petropavlovsk now finds itself the target of ire from three of its largest shareholders, who collectively own more than 30% of the company’s outstanding shares and who have nominated four individuals in opposition to the company’s existing six-person board. The dissidents’ case largely centers around ambiguous allegations of corporate governance shortcomings and past strategic missteps at Petropavlovsk. Some of the dissidents’ concern may also stem from the failed negotiations in 2016 between the company and one of the dissidents, Renova, regarding the potential acquisition by the company of certain of Renova’s gold assets. For its part, Petropavlovsk has refreshed its board in recent years, as all three of its existing independent directors were appointed within the past two years. Petropavlovsk has also committed to select a permanent independent non-executive chairman and add an additional independent director. Whether these board changes are enough to satisfy a majority of Petropavlovsk’s shareholders remains to be seen.
Mitsubishi Motors Corp
Tokyo Stock Exchange – June 23
It’s been a wreck of a year for Mitsubishi Motors Corp. After getting ticketed for faulty emissions data, the company was forced to halt sales and may have been a total write-off were it not for a strategic alliance, which saw Nissan take a 34% stake and install several executives on the board. That includes Mitsubishi Motors’ new chairman, Carlos Ghosn, who also serves as CEO of Renault and Nissan. Mitsubishi Motors wasn’t the only Japanese automaker to get caught falsifying data. However unlike at rival Suzuki, Mitsubishi Motors’ emissions data appears to reflect a corporate culture more focused on cost-cutting and cover-ups than investment and true compliance. The problems stretch back at least as far as 2000 and 2004, when a whistleblower scandal nearly bankrupted the company, prompting a $4 billion bailout, reform recommendations from an independent investigation, and a management overhaul that installed Mr. Osamu Masuko as the company’s representative director, president and CEO.
Under his tenure, Mitsubishi Motors ostensibly complied with the aforementioned investigation’s recommendations, only to find itself once again beset by scandal and reliant on outside intervention to stay on the road. And like night follows day, with another scandal comes another independent investigation. This time, the investigative committee neglected to make specific preventative recommendations. That’s because in reviewing how the company got here, it noted that its ‘compliance’ was largely superficial, with new audit and compliance structures found to be overly complicated, redundant and ultimately ineffective. This approach was demonstrated yet again when the company re-tested its emissions last autumn, and used a legal loophole to conduct dozens of tests and cherry-pick the best results – legal, but “counter to the spirit of the law.” Rather than serving as a roadmap to reform, these externally-imposed targets – whether for vehicle emissions, or implementing internal controls – instead appeared to serve as mere hurdles to be overcome by any means necessary, without addressing (or in some cases compounding) the underlying problem. Instead of issuing more recommendations, the committee highlighted areas that need to be reviewed, and emphasized the critical need for reform to flow from internal review rather than external pressure. The company now has a revitalized board (which save for Mr. Masuko’s continued presence has been largely reconstituted, with eight of eleven directors appointed in 2016), and an injection of Nissan’s management; however, will that be enough to change the corporate culture?
OTHER NOTABLE MEETINGS:
- Gamesa Corporación Tecnológica, S.A. (Bolsas y Mercados Españoles – June 20)
- Pegatron Corp (Taiwan Stock Exchange – June 20)
- BlackBerry Limited (Toronto Stock Exchange – June 21)
- KDDI Corp. (Tokyo Stock Exchange – June 21)
- PJSC Lukoil (Moscow Exchange – June 21)
- SoftBank Group Corp. (Tokyo Stock Exchange – June 21)
- Türk Telekomünikasyon A.S (Borsa Istanbul – June 21)
- Kroger Co (New York Stock Exchange) – June 22
- Raiffeisen Bank International AG (Wiener Börse – June 22)
- Rosneft Oil Co OAO (Moscow Exchange – June 22)
- Aon plc (New York Stock Exchange) – June 23)