Negative effect due to parent-subsidiary listings | Improve Tosho’s shareholders’ value Strategic Capital, Inc.
What we hope Tosho to improve the shareholders’ value as a shareholder are 1) improvement of its extremely low operating profit margin through reconsidering mid-term management plan and investment plan and 2) Special dividend funded by disposal of RECRUIT shares to optimize excess net assets.

Negative effect due to parent-subsidiary listings

On 7th March 2019, Prime Minister Shinzo Abe held the meeting of the Council on Investments for the Future at the Prime Minister’s Office. The government of Japan showed concerns toward the parent-subsidiary listings as shown in the meeting’s materials that states it is difficult to ensure effective corporate governance on parent-subsidiary listings and that may harm minority shareholders of subsidiary. There were investors’ opinions in the same materials as follows:–

– Notwithstanding the outside directors who should be representatives of minority shareholders consist the member of the board, it is strange that the board members do not know investors’ opinions nor share information thereof.
– I was rejected when I requested a dialogue with a parent company as a shareholder of its subsidiary. The parent company argues that the subsidiary is an independent company. As a result, the board of listing subsidiary is given a free hand and no measures are taken against poor share prices.

Prime Minister Abe made the following statement in response to the circumstances above.
“We will therefore swiftly formulate new guidelines and request accountability of parent companies, while encouraging subsidiary companies to increase the proportion of external directors, who are independent from the controlling shareholder.
We will also consider relevant measures including the criteria used by the Tokyo Stock Exchange. These improvements of corporate governance regarding parent-subsidiary listings will be incorporated into the action plan for the growth strategy which will be compile this summer.”

Open in Another Window(the Prime Minister’s Office’s HP)

We think the backgrounds of the government policy above are as followings;

On 22nd June 2018, Corporate Governance System Study Group, led by the Ministry of Economy, Trade and Industry, announced a document specifying as follows: –
– In the discussion of Legislative Council of the Ministry of Justice, the majority approved that directors of a parent company have an obligation to administrate its subsidiary companies’ shares as assets.
– There is a consensus that it is a duty of directors of a parent company to supervise its subsidiaries.

This surely applies to Toppan and Tosho. Directors of Toppan have responsibility to supervise Tosho and increase the value of Tosho’s share that is an asset of Toppan.

Open in Another Window(METI’s document)

This obligation of parent company’s directors overlaps with that of stewardship for institutional investors who invest in the subsidiaries. Therefore, the parent company’s directors can fulfil their obligations for the supervision of its subsidiary’s governance via positive dialogues with institutional investors above.

Clearly, it is a negative effect of parent-subsidiary listings that Japanese government showed concern. An opinion of subsidiary’s shareholders is neglected because a parent company like Toppan lacks awareness of responsibility for the supervision of its subsidiary’s governance.

In terms of this negative effect, we have submitted our opinion to Tokyo Stock Exchange in January 2019. The opinion states that listed subsidiary should organize its board of directors of which the majority shall be “truly” independent outside directors in order to remove the negative effect of parent-subsidiary listings. In addition, we have also submitted our opinion to the same effect above to Financial Services Agency in Japan in January 2018.

Our latest shareholder proposal in June 2018 got more than 40% favour votes by excluding Toppan’s votes.

The supplementary Principles1.1.1 in the Corporate Governance code states “When the board recognizes that a considerable number of votes have been cast against a proposal by the company and the proposal was approved, it should analyse the reasons behind opposing votes and why many shareholders opposed, and should consider the need for shareholder dialogue and other measures.”.

This principle’s “proposal by the company” can be replaced as “proposal by the shareholder” and “opposing votes and why many shareholders opposed” as “favour votes and why many shareholders agreed”. Therefore, the board of Tosho should consider the opinion of minority shareholders seriously.

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