Some Simple Questions for Softbank

For companies with Softbank Group’s corporate governance structure (a company with Board of Statutory Auditors), Article 362 of Japan’s Company Law stipulates the following:

…..(4) [the] Board of directors may not delegate the decision on the execution of important operations such as the following matters to directors: [which means: “may not delegate these matters to directors or anyone else with executive responsibilities. In other words, the board must approve the following: ]
(i) The disposal of and acceptance of transfer of important assets;
(ii) Borrowing in a significant amount;
(iii) The appointment and dismissal of an important employee including managers;
etc. “”

Because of this language in the law, companies draft up “criteria for board decisions” (“fugi kijun”) , and have them approved by the board. These criteria define numerically (and in other ways if necessary) what will be considered “important” under each of the categories set forth above and therefore will require board approval, e.g. purchases of real estate larger than 1.0 Billion Yen (about $10 million), investments or acquisitions larger than 2 Billion Yen ($20 million), etc. – a “limit amount” referred to below as “X” .

This is essential for two reasons: (a) for small transactions, the board wants individual executive officers (“executive directors”) to be able to act fast to seize opportunities, without wasting time and without cluttering up the board’s agenda, displacing more important matters; and (b) on the other hand, the board wants to make it very clear that for deals larger than an amount of “X”, board approval is required. Without specifying “X” for different types of transactions/decisions, executives would be able to just write their own rules post facto and the sky would be the limit…. which would run against the clear intent of the law.

Next, each year the Board of Statutory Auditors (who attend board meetings, but do not vote must do (a) an “accounting audit” to confirm that internal audit and the external audit firm have done their jobs, and that the financials are accurate and (b) a “legal audit” to confirm that the company is generally compliant with all laws, – including most importantly confirming that they think that the voting directors are performing their legal duties of due care and loyalty under the Company Law to a minimum standard. At the end of each fiscal year, each of the Statutory Auditors must decide whether he or she is willing to sign a letter confirming (a) and (b), and it is a very major problem for the company if even one of them does not do so.

As best as I can tell from Softbank Group’s Corporate Governance Report as submitted to the Tokyo Stock Exchange (Japan Exchange Group), many investment decisions at Softbank Group have been delegated to an Investment Committee composed of five executive directors (no outside directors). That report states: ” The Investment Committee and the Brand Committee are decision-making bodies that have been delegated decision-making authority by the Board of Directors.” Softbank Group’s financial report submitted to the FSA states that the Investment Committee can only make decisions to approve investments that are not greater in size than certain amount, but does not specify what that limit is.

If I was a statutory auditor at Softbank Group, if the board had not specified reasonable limitation amounts (“X”) for different types of transactions, then I would have trouble signing a letter at the end of the years saying that the voting directors are performing their legal duties of due care and loyalty to a minimum standard….because the board itself had not set a reasonable limitation amount. What is “reasonable”? Well, there is no set formulaic standard, but even in the case of Softbank Group, in a court of law it is probably a lot smaller than 50 Billion Yen (about $500 million). Certainly I wouldn’t want to take my chances with any number larger than 10 Billion Yen in front of Japanese judges, who have a lot of discretion to decide what is “reasonable” and what is not. Normally, the limitation amount for investments is much, much smaller than this.

So my questions to Softbank Group are: (a) what exactly is the company’s limit amount “X” in the case of investments? ; (b) how much time and meaningful oversight are the outside directors at Softbank Group devoting to reviewing its multitude of large investment transactions, given that out of 12 board members, only three are external, two are brand new, one is an academic, and the third is Mr. Yanai of Fast Retailing – an extremely busy man who has been a director for 18 years so arguably is past his shelf life? and (c) inasmuch as Softbank Group has promised to improve governance practices at investee companies such as WeWork, does it intend to do anything to improve its own governance practices, which lack (even informal) committees to oversee nominations and an compensation matters, and have fallen painfully short in the area of succession planning?

Interestingly, if Softbank Group’s board wanted to avoid setting what might be considered to be an “unreasonably high” limit amount while also delegating clear legal authority to make decisions about very large investments to executive directors (such as Mr. Son, the CEO), it could easily do so. Article 373 of the Company Law permits boards of companies of this type to set up a “Special Board” composed of only three “special directors”, who can all be executive (not outside) directors if so desired. This Special Board, by majority vote, can formally decide to make large investments and divestments, or to borrow large sums. The Special Board must then immediately inform all the other directors of its decision, which legally is just as valid as a regular decision made by the full board. Since it is easy for three executive directors to quickly meet at short notice, this is a very flexible way to enable quick decision-making without convening the full board. But it does not seem that Softbank Group has established a Special Board.

by Nicholas Benes (opinions are my own)

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.