GMI Blog – “Shareholder Spring Comes to Japan… at Least at Mizuho Financial Group (Part 2)”

The following entry appeared as part of GovernanceMetrics International’s GMI Blog. GMI is the leading independent provider of global corporate governance and ESG ratings and research. Corporate stakeholders – including leading investors, insurers, auditors, regulators and others – use GovernanceMetrics services to identify and monitor risks related to non-financial measures covering key environmental, social, governance and accounting risk factors.

Shareholder Spring Comes to Japan…at Least at Mizuho Financial Group

(By Nicholas Benes – Representative Director of The Board Director Training Institute of Japan. This is the second part of a two-part blog.)

The Power of “Reasonable Proposals”: Mizuho Financial Group

The best example of the potential for a positive and constructive feedback loop arising from “eminently reasonable” shareholder proposals in Japan was set by Mizuho Financial Group’s AGM. Out of ten shareholder proposals that were submitted by various individuals, eight were supported by more than 10% of all voting shareholders, and an impressive seven received 23% or more voting support. Fully seven were supported by ISS.

Not surprisingly, the proposal that received the most support was the most clearly “reasonable” one. This was a proposal that would have required Mizuho to simply disclose whether it had a policy for training directors about governance and the law, and if so, to disclose what that policy entailed, and the actual training that took place during the prior year. Given that shareholders are asked to approve director candidates based on their qualifications and most Japanese believe that education and training are good things, it is not surprising that this proposal (#7) garnered the highest level of support of all, an impressive 28%.

Why are these numbers significant? First of all, they reflect a level of anger and distrust about large corporations and their governance practices which has not been seen before in Japan.

Secondly, as GMI Ratings Blog readers know well, in most countries if a shareholder proposal is supported by more than about 20% of voting shareholders, it is considered a sharp rebuke of current management, which then is put under intense pressure to take some sort of concrete action on that item over the next year.

Thirdly, Japan is one of the few countries with no soft-law rules whatever with respect to the training or qualifications of board members (including both directors and “statutory auditors”), or disclosure about these topics. It has no “corporate governance code” to begin with, and in contrast to regional competitors such as Hong Kong and Singapore, the Tokyo Stock Exchange (TSE) has no rules about director training or disclosure of company policy about it. When the TSE recently asked for public comments about how to “restore market confidence”, it received a number of comments criticizing this fact – including from Michael Woodford, and then immediately proceeded to do absolutely nothing about it because Corporate Japan was resistant even to simple disclosure. (This is unsurprising, given that most companies do not provide any director training at all to their overwhelmingly internal boards. Requiring disclosure of this would be… well, embarrassing. )

Predictably, Mizuho shareholders have just concurred with many others that something more than nothing needs to be done to encourage training of board members. It doesn’t take a genius to figure this out. Just consider that the duties of statutory auditors are mainly: (1) auditing the legality of board decision-making; and (2) auditing the financial statements for accuracy… yet they are not required to have any knowledge, training, or prior experience with respect to law or accounting.

Below, I have set forth the substance of the seven shareholder proposals made to Mizuho Financial Group by Mr. Yasushi Nakayama (a private investor) and others which received voting support in excess of 23%. All of these were proposals to amend the Articles of Incorporation in ways that were logically hard to dismiss as silly or “fringe”. The translated sentences are those given by Mizuho Financial Group, except where word usage was incorrect:

Proposal #6: (27% support) The Company shall instruct its subsidiaries that the Company administers, such as bank subsidiaries and securities companies subsidiaries, in exercising voting rights of shares held for strategic reasons, to exercise their voting rights appropriately by means such as seeking opinions from independent proxy advisers. [Note: intended to prevent “blindly” supporting cross-held companies’ managers]

Proposal #7: (28% support) The policy, contents and results of the training provided by the Company and its consolidated subsidiaries for their board members shall be disclosed on the Company’s website.

Proposal #8: (27% support) The amount of compensation and/or bonus to be paid to Directors and Corporate Auditors during each fiscal year shall be described and disclosed — on an individual basis for such Directors and Corporate Auditors.

Proposal #10: (26% support) The restriction on the number of characters in a description of reasons for a shareholder’s proposal shall be relaxed from 400 to 4,000.

Proposal #11: (28% support) With respect to voting forms for general meetings of shareholders of the Company, blank voting forms without indications of shareholders’ approval or disapproval should not be treated differently for the Company’s proposals and the shareholders’ proposals. [Note: intended to prevent Mizuho FG from effectively voting blank proxy cards in favor of its own proposals but against shareholder proposals]

Proposal #12: (24% support) In principle, a Director is prohibited from acting concurrently as chairman of the meeting of the board of directors and CEO, and any of Outside Directors shall act as chairman of a meeting of the board of directors. [Note: intended to split the roles of Chairman and CEO, with the former served by an outside director]

Proposal #13: (23% support) A liaison for whistle-blowing within and from outside the Company with respect to misconduct of in-house members of the Board of Directors shall be established at the Board of Corporate Auditors.

The Proposal Requiring Disclosure about Director Training

This proposal is fascinating to me not only as head of a nonprofit that trains directors, but also because it exemplifies why I believe we will see more “eminently reasonable” shareholder proposals like it. In short, Mr. Nakayama made a cogent argument, and Mizuho responded publicly with what other shareholders could easily see was an evasive, even lackadaisical response. From the proxy materials:

Reasons for Proposal

The brief personal records of candidates for Directors and Corporate Auditors presently described in convocation notices for general meetings of shareholders are not sufficient to determine whether or not each candidate is an appropriate person for Director or Corporate Auditor when voting for such Directors and Corporate Auditors. Monitoring and supervising the Company as a whole is different from executing business in each department, and for the performance of board members’ duties, it is necessary for that person to be well-acquainted with his or her obligations as a board member as well as the general business, including areas he or she has not yet experienced. The level of such knowledge and the attitude held by not only candidates for outside board member positions, but also candidates from inside the Company who constitute the majority of the candidates, is not clear. Therefore, disclosure about board member training on the Company’s website as to its policy (the persons to receive training, the time when training is to be iven and the type of training), contents (training details, training period and training provider) and results (persons who received and did not receive the training) can enable shareholders to approve candidates with confidence.

In addition, the Company’s responsibility is limited only to the duty of disclosure, thereby putting fewer burdens on the Company. Opinion of the Board of Directors of the Company

The Board of Directors of the Company opposes this proposal.

The Board of Directors also recognizes that Directors and Corporate Auditors of the Company are required to have broad knowledge and attitudes as board members in order to perform their duties, and believes that such broad knowledge and attitudes as board members should be gained through experiencing various kinds of duties, etc.

When selecting candidates for Directors and Corporate Auditors, the Board of Directors determines as the candidates, persons whom it concludes to be appropriate as Directors and Corporate Auditors of the Company, based upon due consideration of the knowledge and experience, etc., required for board members, including knowledge of general business, as well as wide-ranging insight and a high degree of expertise gained through duties experienced inside and outside the Company.

After this, the information necessary for shareholders in their selection is appropriately provided in reference materials for ordinary general meetings of shareholders in accordance with laws and regulations.

Accordingly, the Board of Directors is of the opinion that it is unnecessary to add the proposed provision to the Articles of Incorporation.

In its response, Mizuho was basically saying: “Just trust us, we select good guys… no special training about governance, law or risk management is needed… and despite what you may think, the limited information that we give you (or do not give you) about candidates is sufficient for you to vote in favor of our nominees.” But it just didn’t pan out the way it used to.

Nicholas Benes is Representative Director of The Board Director Training Institute of Japan (BDTI), a non-profit “public interest” organization certified by the Japanese government to provide training and education about corporate governance and related matters. In order to maximize its impact as a change agent, BDTI needs the support of investors in the Japanese market. Contact:

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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