When nearly 95 per cent of public companies in one of the world’s major economies hold their shareholder meetings at the same time on the same day, you would normally expect a glut of stories to emerge. Various contentious issues coming to boiling point. Managements being seriously challenged by shareholder activists keen to have their moment in the spotlight. Maybe the odd large institution publicly throwing its weight behind a critical proposal against management.
Not so in Japan. And that’s the whole point. With around 2,300 Japanese companies holding their meetings at 10 am on June 27 this year, it becomes a little bit difficult for your serious activist to cause that much trouble. Safety in numbers really comes into play, since the media can only concentrate on a few big stories and the sokaiya are kept under control.
The fear is that the sokaiya – gangsters who buy up a small number of shares in a company and then extort money from managements by threatening to disrupt shareholder meetings – will run the show. By holding meetings at the same time, companies hope to prevent that happening at any more than a few meetings. It also tends to keep genuine shareholder complaints under wraps, too. That’s just an added bonus. Throw in a few loyal employees at the meetings to chant support for management and in most cases you have a short meeting wholly supportive of company policy.
Indeed, any thoughts that the influence of the sokaiya was on the wane in recent years due to a police clampdown have been dispelled by this year’s proxy season. The number of companies staging simultaneous meetings hit a new record this year, requiring some 10,000 police to be mobilised to protect them. And, in the event, they were largely without incident. But fear of corporate embarrassment has been running high in Japan in recent months with the country’s troubled economy and there weren’t many managements prepared to go it alone.
Those worries were publicly highlighted in early June by the arrest of three senior executives at leading department store Takashimaya. The executives stand accused of making payments to the sokaiya over a number of years to keep the company’s shareholder meetings running smoothly. That raised the question that many other leading companies were still in the control of the sokaiya and preferred making substantial payments to the mob over running the risk of personal and corporate shame in public.
But that’s just what happened to Takashimaya and the executives involved once the revelation came out that they had allegedly paid some $730,000 to the sokaiya in 1995 alone. Municipal authorities holding large trading accounts with the Japanese equivalent of Macy’s resolved to end their business with the store. Public and corporate condemnation was rife. The share price spiralled downwards and Takashimaya’s president Hiroshi Hidaka was forced to apologise for the company’s wrongdoing: ‘There is no excuse for what we have done,’ he said at a news conference.
With that background in the run-up to the big day at the end of June, it’s hardly surprising that a few managements had the jitters. Some, of course, were probably relieved that it was Takashimaya’s executives which were caught in the act and not their own. Several observers on the Japanese state of corporate governance have pointed out that the activities of the sokaiya continue because companies pay little heed to the desires of genuine shareholders. Whether that’s the fault of a typically acquiescent shareholder base or the company’s themselves is another issue. Whatever the story, when a Japanese company falls victim to domestic shareholder disapproval something must have been going seriously wrong.
Sumitomo Corporation is a case in point. The copper trading scandal caused by the activities of Yasuo Hamanaka broke in the week before the company’s shareholder meeting and several of those attending seized the opportunity to vent their wrath upon management for poor internal controls. Crucially, though, it was only a minority of the 400 or so present at the meeting which voiced their opposition to management.
Sumitomo had managed to stage the event in classic Japanese style with the floor crowded by supportive employees forcing many of the outside shareholders into an ante-room to watch proceedings on television.
The management’s recovery plan involves establishing a $1.4 bn reserve fund to help cope with the $1.8 bn lost in unauthorised trades. The fund will be partially paid for by the cancellation of a $231 mn stock buy-back and bonuses to directors. The latter move was welcomed by shareholders present at the meeting. But Sumitomo was criticised for the cancellation of the buy-back which further punishes shareholders for the company’s troubles.
However, there was little chance for public haranguing of management at the meeting. The whole event was over in around 45 minutes with a yes vote for the recovery plan from the floor. How was that judged? Sumitomo officials claimed that the ‘loudness’ of the yes vote from those present would suffice and that no direct balloting was necessary. That, they claim, is standard practice.
Mitsubishi Motor Corporation’s meeting probably attracted the second highest level of public attention on the day. And that’s a testimony to just how well the Japanese corporate community has the shareholder meeting process wrapped up. Mitsubishi’s moment was disturbed by a protest relating to a lawsuit alleging that male workers at one of its American operations sexually harassed female colleagues.
No domestic shareholder anger here, though. The protest was led by an American activist who had travelled over especially for the meeting. And, despite the attention, the 30 or so protesters were outnumbered three-to-one by the media anxious to get the protest story. No questions were asked about the lawsuit in the meeting and management could breathe a sigh of relief when their annual duty was over within 30 minutes.
So what do foreign institutions make of this annual ritual? John Taylor, senior analyst at the Investor Responsibility Research Center in the States, says that it was a fairly typical year for Japanese meetings. Most of the companies are simply fulfilling their statutory obligations and do not expect any challenges against managements’ right to run the companies unhindered.
Aside from the issues raised above, Taylor points to a ‘boatload of shareholder proposals’ at the electric utilities from anti-nuclear shareholder groups which table resolutions largely to put their cause in the public domain. Few of the resolutions gain any institutional support – being more of a pressure group activity than a shareholder value concern. However, in recent years some of the groups have become more adept at wooing foreign institutional support from Calpers and the like by tabling better crafted resolutions. A few this year, for example, called for the appointment of an environmental statutory auditor which led to some foreign support. But with the virtual assurance of no backing from domestic institutions the resolutions are doomed to fail.
In fact, the whole question of statutory auditors at Japanese companies continues to be an issue of concern for foreign investors. Japanese law dictates that these second-tier directors should be independent. But an oft-pursued loophole allows companies to appoint people who may have worked for the organisation all their lives: as long as they haven’t been direct employees for five years they are considered independent. That includes those who move from salaried positions to the board for the five year period before being judged as ‘independent’ enough to become statutory auditors.
Calpers’ international proxy voting guidelines state that, ‘In Japan internal auditors specified as independent but with a past affiliation with the company will not be supported.’ Despite that principle – which many other institutions also adhere to – Taylor does not believe that there was a concerted opposition from US institutions to such appointments this year.
Proposals which did gain some foreign institutional support were sponsored by an Osaka-based investment group which called for increased dividends and share repurchase plans at a number of companies. Taylor comments that such proposals rarely emanate from domestic shareholders – only those independent groups managing significant investments. But when they do they can often attract the support of US-based institutions eager to seize the opportunity to point managements in a certain direction.
For most foreign institutions, though, it remains a question of putting a tick in the box with management in much the same fashion as the domestic institutional investors. Dennis Clough, a portfolio manager at Schroder Investment Management in London, says that all the holdings are voted but they are not in a position to challenge managements. Clough notes that, although all the meetings are held on the same day, the arrival of proposals and agendas from the custodian banks is staggered in the lead up to end of June, allowing his team to cope with the numbers. The biggest problem is the translation of materials.
Translation and timely notice of Japanese meeting agendas is something which Maryland-based Institutional Shareholder Services thinks it has got down to a fine art this year. The proxy voting agency claims that it delivered a near perfect record of meeting agendas and voting recommendations on the 1,520 companies it covered for its clients.
ISS complains that the main difficulty is gathering and reviewing the flood of information and getting votes back to the banks in a timely manner.
Howard Sherman, president of ISS, says the process has slowly become easier over the last few years as custodians have become more responsive to the needs of interested foreign shareholders. ‘The early receipt of agendas and ISS recommendations allowed us to meet all of our voting deadlines in Japan this year,’ adds Terry Barrett, senior global voting agent at ISS. ‘Our clients and their global custodians were pleased with the efficiency and timeliness of the Japan operation which is usually an organisational nightmare.’
The secret of ISS’s success this time around? Setting up a temporary Tokyo operation in the run-up to the annual meetings gave it proximity to the information and enabled it to increase its coverage. ‘Our materials suppliers were very cooperative and helpful in getting the materials to us early,’ says Bruce Babcock, ISS’s vice president of global research, who was in Tokyo at the time. ‘We’d received, reviewed and delivered a substantial number of proxies by June 12 – a full 15 days before the meeting date.’
Things may be getting easier for foreign institutions to judge and vote their proxies in Japan but it will be a long time before they or the domestic institutions have any substantial impact on the attitudes of Japanese management. Taylor at IRRC says that it would be a help if the season was less concentrated but he sees no evidence of that being likely in the near future while the sokaiya continue their activities. In the meantime, he notes that June is not a good time for a vacation.
