Forty-eight Japanese companies received shareholder proposals (162 proposals in total) at the June 2021 general meeting of shareholders. This is a slight decrease compared to last year, when 55 companies received shareholder proposals (the most on record). As 54 companies received proposals in 2019, this year is still the third largest shareholder proposal in the past 10 years1. According to the Asahi Shimbun, this year there are 182 listed companies proposed by shareholders for rights protection. Although it is slightly less than the 23 listed companies proposed by shareholders for rights protection last year, there is no sign of slowing down.
Our analysis is that at the annual general meeting of shareholders at the end of the traditional June AGM season, among the 15 companies (33 proposals 3 in total) that received shareholder proposals from rights activists, 13 companies received more than 20% of shareholders’ approval , Has won the support of more than 30% of shareholders four times. Coupled with the overall decline in the number of shareholder proposals, this year’s shareholder proposals did not reach the support of the shareholders meeting in June last year (30 proposals were supported by more than 20% of shareholders, and 14 proposals were supported by the general meeting of shareholders). 30% or more shareholders 4). Having said that, more than one-third of shareholder proposals this year have been supported by more than 20% of shareholders. It can be seen that shareholders have adopted a positive attitude towards participating in corporate governance.
In particular, ESG-related proposals (including corporate governance) have attracted much attention this year. 5 With the continuous deepening of corporate governance and management codes, the company continues to devote itself to corporate governance. With the reduction of cross-shareholding, shareholders make suggestions on corporate governance structures, even for companies with strong financial performance. In addition, in the context of the company's ESG policy, after Kiko Network submitted a shareholder proposal to Mizuho Bank Financial Group in 2020 and received more than 30% shareholder support, three companies outside the power industry received shareholder proposals regarding climate change this year. 6 Due to the structure of the Japanese legal system, only matters resolved by the general meeting of shareholders can be the subject of shareholder proposals. Therefore, proposals related to climate change often take the following forms to amend the company's articles of association. About two-thirds of shareholder proposals this year (108 proposals) include proposals to amend the company's articles of incorporation. Only 17 shareholders proposed to distribute surplus capital to return profits to shareholders. 7 Naturally, the general consensus is that the need for two-thirds of shareholder approval to change the company's articles of incorporation is a major obstacle. In addition, according to an article by Nihon Keizai Shimbun, the approval rate of shareholders' proposals to amend the company's articles of incorporation at the general meeting of shareholders in June this year was 14.8% (as of July 2, 2021). The reason for the decrease in the approval rate of similar proposals from 18.1% in 2020 is said to be based on the opposing proposals of voting consulting companies and the general risk aversion stance of institutional investors. 8 This reflects that sometimes not only the management, but also other shareholders, believe that it is necessary to carefully change the articles of association that reflect the company's basic principles to reflect the wishes of shareholders. 9 Based on the current situation in Japan, more and more shareholders are seeking a fundamental change in the company’s business methods. When the shareholder proposal system is difficult to achieve such changes, some experts suggest actively using consulting proposals to enable the company to respond flexibly, thereby encouraging The company reflects the desire of management shareholders to have a constructive dialogue with both parties. 10 We want to pay attention to whether the use of shareholder proposals as a means of promoting dialogue and cooperation between shareholders and management (which does not necessarily lead to conflicts) will continue to increase, and whether this change in attitude will occur outside the legal system.
At the general meeting of shareholders of Heiwa Real Estate (which owns the Tokyo Stock Exchange Building and the Osaka Stock Exchange Building) this fiscal year, a Hong Kong investment company proposed to amend the company’s articles of incorporation to prevent the appointment of board members who had previously served in the Japan Stock Exchange Group (which owns Tokyo Stock Exchange). Stock Exchange and Osaka Securities Exchange) have worked for more than five years. 11
The previous CEOs of Heiwa Real Estate are all from the Tokyo Stock Exchange. Among the nine current directors approved by the shareholders meeting in June, three including President Kiyoyuki Tsuchimoto are from the Tokyo Stock Exchange. LIM Advisors, which put forward the shareholder proposal, pointed out that the company’s largest rental property, the Tokyo Stock Exchange building, has lower rents than properties in surrounding areas. Conflict of interest, resulting in the company’s profits being harmed by the "unhealthy" relationship between the two companies.12
In this regard, Heiwa Real Estate does not admit that "amakudari" has occurred and claims that there is no causal relationship between the "amakudari" of the Tokyo Stock Exchange and the rental price. 13 Although the shareholder proposal was ultimately rejected, it attracted 19.5% of shareholders’ support.
In addition, on March 25, at the RaQualia shareholders meeting, individual investor and lawyer Yuichi Kakinuma who holds more than 10% of RaQualia's shares submitted a proposal to appoint three new directors (including himself). The proposal received overwhelming support from shareholders and was finally passed. At this meeting, after the company’s management explained the proposal, Mr. Kakinuma successfully submitted an urgent motion to elect Mr. Nakanishi, who is also a lawyer, as the chairman of the meeting. After changing the chairman under this unusual situation, RaQualia’s existing directors and new director candidates held a question and answer session to answer shareholders’ questions about management policies. Therefore, all parties have had a meaningful debate, which can be said to be rare in a general meeting of shareholders. 14
However, it is undeniable that the new management team appointed with the support of individual shareholders faced challenges from the beginning. As an outside director, Mr. Kakinuma will supervise and participate in the management, responsible for ensuring the company's short- and medium-term profits and implementing the company's growth strategy. As a manager, it is necessary to respond to the expectations of individual shareholders who have made significant contributions to the management reform and obtain the support of employees. The composition of the management team may reflect internal power dynamics, and the wishes of managers may not be uniform. One view is that the focus will be on the cooperation between RaQualia's head of R&D Shuzo Watanabe (who is an internal manager and opposes shareholder proposals) and the new president Takeuchi Hirofumi (former employee). RaQualia.15
It goes without saying that shareholders not only seek the corporate governance of senior managers, but also seek the corporate governance of the company and its group companies more broadly. The LIM Advisors mentioned above, in response to the trend of listing of subsidiaries in recent years, proposed at Digital HD’s general meeting of shareholders to incorporate relevant regulations on the management of listed companies into the company’s articles of association. An employee of Sold Out, one of Digital HD's listed subsidiaries, was arrested last year on suspicion of participating in illegal advertising about the efficacy of health foods. Therefore, the shareholders proposed to require Digital HD as its parent company to pursue the supervision of Sold Out because of the dysfunctional governance of the group. 16
In this regard, Digital HD proposes to take measures to strengthen corporate governance, such as increasing the number of executives, improving the risk management system in place, increasing the number of outside directors of Sold Out, and clarifying related supervisory functions. In addition, Digital HD opposes the shareholders’ proposal and believes that it is reasonable to retain a listed subsidiary operating in a different industry, because the group’s overall business portfolio strategy is to transition from the marketing business to 17. In this case, the above shareholder’s proposal has received more than 20 % Of shareholders support, once again showing the harsh view that shareholders promote the listing of subsidiaries.
Although shareholder proposals that focus purely on profits are indeed not as prominent as before, proposals to improve the effective allocation of capital as part of the emphasis on corporate governance have certainly not disappeared. 18 Asset Value Investor (AVI), a British asset management company stated that the interests of small and medium shareholders of three companies whose shareholders hold more than 50% of the voting rights have been harmed, and proposed to return the surplus to the shareholders of each company: NS Solutions, its Owns parent company; auto parts manufacturer Tokyo Radiator Manufacturing Co., Ltd.; and SK Kaken Co., Ltd., a construction coating company. 19
The CEO of AVI stated that “we will continue to oppose the management’s long-term strategy of ignoring the interests of minority shareholders under the influence of controlling shareholders.” 20 The CEO asked to support shareholder proposals because management has been unable to analyze important issues in a complex or standardized manner. Business/financial objectives, which are due to the influence of the controlling shareholder, whose interests are inconsistent with the interests of minority shareholders in the management culture21 (both proposals were rejected). twenty two
Four environmental non-governmental organizations (NGOs) as individual shareholders, including Kiko Network, Market Force, Rainforest Action Network and 350.org Japan, submitted shareholder proposals to Mitsubishi UFJ Financial Group. The shareholder proposal calls for amendments to the company’s articles of association to formulate and disclose management strategies, including investment goals and indicators based on the purposes of the Paris Agreement (the international framework for climate change goals).
In response, Mitsubishi UFJ Financial Group announced specific policies to address climate issues ("MUFG Carbon Neutrality Declaration"). 23 In addition, as part of the same declaration, Mitsubishi UFJ Financial Group announced that it will become the first Japanese company to participate in the "Net Zero Banking Alliance" (UNEP FI) established in April this year by the United Nations Environment Programme Financial Initiative (UNEP FI) NZBA). 24 However, the environmental NGO claimed that Mitsubishi UFJ Financial Group has not announced any specific steps. It is in line with the Paris Agreement and continues to call on Mitsubishi UFJ Financial Group to take a series of concrete actions to strengthen its response to climate issues. 25 Although the proposal failed, it did attract 23% of shareholders to vote for it.
In addition, the NPO Market Force, which cooperates with investors and companies in the environmental finance field, submitted a shareholder proposal to Sumitomo Corporation. 26 Taking Mitsubishi UFJ Financial Group as an example, the shareholder proposal requires the formulation and disclosure of a business strategy consistent with the Paris Agreement’s goal of reducing emissions below 1.5°C.
In response, Sumitomo Corporation 27 announced plans to withdraw from coal-fired power generation, which includes not launching any new coal-fired power generation-related businesses. The goal is to end all coal-fired power generation businesses by the second half of 2040 and not launch any new coal-fired power generation. Related Business. Regarding the new power plant construction project. However, environmental NGOs did not withdraw their shareholders' proposals on the grounds that Sumitomo Corporation's plans are far behind. Rights activists specifically pointed out that Sumitomo Corporation's plan to completely withdraw from the coal-fired power generation business will only begin in the second half of 2040, and it has not changed the policy that allows it to continue to obtain new orders for some new power plant construction projects. 28 Although the proposal was rejected, 20% of shareholders supported it. This result was analyzed to indicate that there was a disagreement among shareholders, as Institutional Shareholder Services (ISS) recommended a vote for the proposal, while Glass Lewis recommended a negative vote. 29
As mentioned above, since amendments to the company's articles of association require the approval of more than two-thirds of present shareholders with voting rights, shareholder proposals are often difficult to pass. Nonetheless, shareholder proposals can serve as an incentive for companies to voluntarily strengthen their own initiatives, such as the Mizuho Financial Group in 2020 and the Mitsubishi UFJ Financial Group and Sumitomo Corporation in 2021. More and more people say that the most important aspect of shareholder proposals seeking such amendments to the company’s articles of association is not the implementation of the proposed amendments themselves, but that they can serve as a catalyst for the company to change its own policies voluntarily. This is related to environmental protection. Is considered correct in the proposal. 30
In June 2021, additional revisions were made to the corporate governance guidelines, and requirements for strengthening ESG-related measures were added. Shareholders are increasingly requesting listed companies to disclose their sustainable development measures and requiring directors to formulate basic policies related to sustainable development. This trend is expected to continue. 31
In an environment where institutional investors and individual investors are increasingly interested in corporate governance and environmental issues, it remains to be seen whether shareholder proposals will continue to be used in the form of advisory proposals. With more and more traditional activists focusing on economic interests and new types of activists focusing on ESG (including in Japan), it is necessary to pay close attention to how this affects the entire system, as well as its content and trends in future shareholder proposals.
Download of the General Meeting of Shareholders: The trend for Japanese shareholders to regard ESG as important is steadily rising
1 Nihon Keizai Shimbun "Shareholders' meeting: Even negotiation is an option. Proposing resolutions to promote dialogue at the shareholders meeting" July 12, 2021 2 The Asahi Shimbun "162 shareholders proposed proposals for 48 companies, attacks and requests related to Counterattack June 22, 2021 3 Climate networks and market forces proposals are not included in the activist proposal. 4 Jun Usami et al. "Japan 2020 Agency Season Results Announced (Latest Trends by Activists)" White & Case Client Alert, July 2020. 5 Nihon Keizai Shimbun "Intense competition between management and shareholders: The corporate governance guidelines have been completely changed in 6 years. The current status of corporate governance (1)" July 6, 2021 6 See footnote 2 above. 7 See footnote 2 above. 8 See footnote 1 above. 9 Nihon Keizai Shimbun "Shareholders, extensive reforms are urged at the general meeting of shareholders Taking action on climate change and corporate governance, 62 companies considered shareholder proposals, but Sumitomo Corporation’s proposal was rejected. ”June 19, 2021 10 See footnote 1 above. 11 Jiji Press “Activist shareholders, propose a proposal to dissolve Amakudari at the general meeting of shareholders” June 25, 2021 12 Heiwa Real Estate's 101st General Meeting of Shareholders Notice 2021 13 Same as above on May 31st. Please note that Amakudari is an institutionalized practice for senior Japanese officials to retire to high-profile positions in the private and public sectors. 14 Toyo Keizai, "RaQualia Pharma's Breakthrough Method Completely Wins at the General Meeting of Shareholders" 15 Same as above. 16 Toyo Keizai "The Reasons Why Major Online Advertising Companies Become the Target of Radical Shareholders" February 9, 2021 17 Digital Holdings "Notice on Receiving Documents Related to Shareholders' Proposals and Board of Directors' Opinions on Shareholders' Proposals" February 19, 2021 18 Asahi Shimbun Digital “Proposals made by 162 shareholders against 48 companies related to attacks and counterattacks related to requests for increased dividends and enhanced environmental measures” June 22, 2021 19 Same as above. 20 Asahi Shimbun Digital, “British Activist Shareholders Regarding Minority Shareholders” Rights questioned Japanese companies" July 27, 2021 21 "Elevating NS solutions to a new level" Joe Bowern Freund, CEO and Chief Investment Officer, Asset Value Investors May 19, 2021 22 "Painting" Better SK Kaken "Joe Bowern Freund, CEO and Chief Investment Officer of Asset Value Investor May 20, 2021 23 NRI "How companies and banks respond to shareholder recommendations on climate change risks" June 30, 2021 24 MUFG Press Release" MUFG Carbon Neutral Declaration" May 17, 2021 25 Climate Network "MUFG became the first Japanese bank to announce its goal of achieving carbon neutrality by 2050. However, it did not show specific measures in compliance with the Paris Agreement, so shareholder proposals will continue." May 18, 2021 26 Market Force "Shareholder proposals submitted to Sumitomo Corporation call for improved countermeasures against climate change" March 29, 2021 27 See footnote 23 above. 28 Toyo Keizai Online "Sumitomo Corporation faces pressure from 20% shareholders to agree to climate change shareholder proposals" June 24, 2021 29 Toyo Keizai Online "Sumitomo Corporation faces pressure from 20% shareholders agree to climate change shareholder proposals" June 24, 2021 30 See footnote 23 above. 31 Commercial Lawyer "Comparison and Analysis of the Standards for Voting Rights Exercising by Consulting Companies and Institutional Investors in the 2021 General Meeting of Shareholders" May 27, 2021 32 As of July 14, 2021, According to our internal research.33 This data was obtained from reports submitted to EDINET, which detailed the holdings of major shareholders and major shareholders from April 1, 2020 to March 31, 2021. Changes in circumstances. The data extracted from these reports is limited to transactions where the purpose of holding shares is for "important proposals"., etc." Does not include transactions where the target company becomes a wholly-owned subsidiary or is privatized. According to our internal research as of July 30, 2021, this data is accurate.
James Keate (White & Case, Associate, Melbourne) contributed to the preparation of this publication.
Disclaimer: Due to the general nature of this update, the information provided here may not be applicable in all situations, and action should not be taken without specific legal advice based on specific circumstances.
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