Foreign Direct Investment Law Amendments

“Earlier this summer, the Corporate Counselor covered amendments to Japan’s foreign direct investment laws that lowered the government approval threshold from 10% to a mere 1% for share acquisitions of publicly-traded companies that engage in a wide range of business activities deemed critical to Japan’s national security, unless an exemption applies. Attached for ease of reference is our June newsletter, which has been updated.
Our June newsletter specifically left for another day a discussion of the shareholder rights ramifications arising from the amendments to Japan’s foreign direct investment laws. This edition of the Corporate Counselor bridges this important gap.
The impact on shareholder rights arising from the amendments to Japan’s foreign direct investment laws is a game change for investments into Japan. The Japanese government now has veto rights over fundamental corporate governance rights throughout the investment cycle. The amendments apply retroactively, so overseas investors may no longer be able to effectively control their existing investments in Japan.”

Professors Bebchuk and Tallarita, “The Illusory Promise of Stakeholder Governance”

“Corporate purpose is now the focus of a fundamental and heated debate, with rapidly growing support for the proposition that corporations should move from shareholder value maximization to “stakeholder governance” and “stakeholder capitalism.” This Article critically examines the increasingly influential “stakeholderism” view, according to which corporate leaders should give weight not only to the interests of shareholders but also to those of all other corporate constituencies (including employees, customers, suppliers, and the environment). We conduct a conceptual, economic, and empirical analysis of stakeholderism and its expected consequences. We conclude that this view should be rejected, including by those who care deeply about the welfare of stakeholders.

Stakeholderism, we demonstrate, would not benefit stakeholders as its supporters claim. To examine the expected consequences of stakeholderism, we analyze the incentives of corporate leaders, empirically investigate whether they have in the past used their discretion to protect stakeholders, and examine whether recent commitments to adopt stakeholderism can be expected to bring about a meaningful change. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off.

Furthermore, we show that embracing stakeholderism could well impose substantial costs on shareholders, stakeholders, and society at large. Stakeholderism would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance. In addition, by raising illusory hopes that corporate leaders would on their own provide substantial protection to stakeholders, stakeholderism would impede or delay reforms that could bring meaningful protection to stakeholders. Stakeholderism would therefore be contrary to the interests of the stakeholders it purports to serve and should be opposed by those who take stakeholder interests seriously…”

Professors Bebchuk, Kastiel and Tallarita, “For Whom Corporate Leaders Bargain”

“At the center of a fundamental and heated debate about the purpose that corporations should serve, an increasingly influential “stakeholderism” view advocates giving corporate leaders the discretionary power to serve all stakeholders and not just shareholders. Supporters of stakeholderism argue that it would address growing concerns about the impact of corporations on society and the environment. By contrast, critics of stakeholderism object that corporate leaders should not be expected to use expanded discretion to benefit stakeholders. This Article puts forward novel empirical evidence that can contribute to resolving this key debate.

During the hostile takeovers era, stakeholderist arguments contributed to the adoption of constituency statutes by more than thirty states. These statutes authorize corporate leaders to give weight to stakeholder interests in considering a sale of their company. We study how corporate leaders in fact used the power awarded to them by these statutes in the past two decades. In particular, using hand-collected data, we analyze in detail over one hundred cases governed by constituency statutes in which corporate leaders negotiated a sale of their company to a private equity buyer.

We find that corporate leaders have used their bargaining power to obtain gains for shareholders, executives, and directors. However, despite the risks that private equity acquisitions posed for stakeholders, corporate leaders made very little use of their power to negotiate for stakeholder protections. Furthermore, in the cases in which some such provisions were included, they were largely practically inconsequential or cosmetic. We conclude that constituency statutes failed to deliver the benefits to stakeholders that they were supposed to produce.

Beyond their implications for the long-standing debate on constituency statutes, our findings also provide important lessons for the ongoing major debate on stakeholderism. At a minimum, stakeholderists should identify the causes for the failure of constituency statutes and examine whether adoption of their proposals would not suffer from a similar fate. After examining several possible explanations for the failure of constituency statutes, we conclude that the most plausible explanation is that corporate leaders have incentives not to protect stakeholders beyond what would serve shareholder value. Therefore, we argue, the evidence we put together indicates that stakeholderism should be expected to fail to deliver, as constituency statutes did: on the basis of the currently available evidence, stakeholderism should not be supported, even by those who deeply care about stakeholders.”

The Evolution of ESG Investment

“We are faced with a time of great change, as exemplified by the development of digital transformation (DX), changes in the socioeconomic structure, an increasing sense of crisis regarding global environmental issues, and changes in people’s mindsets. To seize these changes as an opportunity to achieve medium- to longterm economic growth and build a sustainable, human-centered society, the realization of “Society 5.0 for SDGs”—a concept originating in Japan—holds the key. Therefore, we conducted joint research toward the realization of Society 5.0 for SDGs with three parties representing the Japanese business community, academia, and investors, namely Keidanren, the University of Tokyo, and the GPIF. In the joint research, a series of discussions have been held with the shared recognition of the importance of stable medium- to long-term funding for companies, universities, and start-ups promoting problem-solving innovation for the realization of Society 5.0 for SDGs.

Accordingly, we have set an aim of realizing Society 5.0 and achieving SDGs by identifying the trend of now globally expanding ESG investment, further evolving it, and connecting it to the promotion of investment in problemsolving innovation. We then examined measures to achieve the aim. Specifically, we established four themes to promote investment in problem-solving innovation, and conducted research on specific initiatives of each player. At the end, through these discussions, we present a future action plan of the three parties for the realization of “Society 5.0 for SDGs.”

METRICAL:Corporate Government Rating of Japan’s 1,800 Companies (July 2020)

So far, we have been conducting analysis focusing on the relationship between improvement of corporate governance and stock price and key performance measures (ROE, ROA). This is the reason that we are keeping close eyes on the enhancement of corporate governance in the perspective of long-term investors. In addition, we decided to analyze the key performance measures based on the past 3 years average ROE and ROA from this month, as maximizing the shareholder value for the long-term or sustainability is a common goal of public companies and shareholders.

It goes without saying that the stock price is one of the important indicators of a public company. In the previous monthly letter as well, I mentioned that the disclosure information of IRs and shareholder meetings is highly correlated with stock prices (Tobin’s Q), key performance measures (ROE, ROA), and comprehensive corporate governance scores. Information disclosure is a very important starting point for management transparency. In fact, the stock price also shows the results of efforts to disclose the above information. Metrical reshuffles the composites of the top 20 companies based on the total corporate governance score as of July every year and provides the performance comparison between CG Top20 stock prices and the stock market indices (TOPIX, JPX400) monthly. It was this month in July that we reviewed the 20 composite companies (the corporate governance score itself changes each month). Lately, the members of the composite companies of CG Top 20 changed from the limited large companies for several years ago, as we expanded the universe from slightly more than 500 companies to 1,800 companies and other companies are willing to improve the corporate governance. This year, 6 companies have been replaced since last year. The 4 completely new companies are Shionogi Pharmaceuticals, Meitec, Kenedix, Net One Systems and NSD. Kakaku.com and Omron returned to the top 20 club again, raising the scores.

METRICAL:June-Stock Market Changed Significantly Due to Concerns of Coronavirus. CG Top 20 Stock Price Outperform Against Topix and JPX400.

In June 2020, the stock market price continued to rise in the first half of the month, following the favorable sentiment that economic activity resumed from the previous month. Since the number of new coronavirus-infected persons has increased worldwide, it has become a nervous development from the middle of the month and has a large up and down amplitude.

Both Topix and JPX400 stock indexes have fallen slightly to -0.12% and -0.01%, respectively, over the past month. CG rating score Top 20 stock price is +0.47%, outperforming both stock indexes significantly.

Redesigning Corporations: Incentives Matter

By Nicholas Benes
(also published in the Harvard Law School Forum on Corporate Governance) 

The Birth of the Corporation: Public Interest Organizations

The evolution of the modern corporation is the fascinating story of a series of self-serving legal and societal mutations over hundreds of years, which have morphed the original concept and endowed corporations with freedom of activity, rights, and limitations on liability that would shock their original “inventors”.

As we all know, for many years most corporations were established by way of an exceptional “charter” by a sovereign, granted only in specific cases where: (a) large amounts of capital were needed (b) to conduct investments and activities that served public or national interests and had good profit potential, but (c) where the risks were so large that few parties would invest if their risk were not shared with many others and/or limited to the amount of money they invested.

In the 1600s and 1700s, the activities that sovereign nations felt met those requirements were the exploration of foreign lands on the other side of the globe, the creation and administration of colonies there, and conducting lucrative trade on long (and dangerous) sea routes to and from those colonies. Thus, the most well-known early corporations include organizations such as the British East India Company (the original “too-big-to-fail company), The Dutch East India Company, the Hudson’s Bay Company, and companies to construct the Erie Canal.

As the industrial revolution gathered steam, the need to raise large amounts of capital increased many times over. Driven by this need, the immense benefits of corporate status for raising financing became increasingly obvious and desirable to investors and managers: easy stock transferability vs. rewriting partnership agreements, separation of ownership from control, legal personhood that simplified large transactions such as loans and large investments (a single counterparty to deal with and sue), and the possibility of receiving a charter that conferred “limited liability” on shareholders. All of these made it much easier to raise funds in large amounts than any other form of business organization.

Message to JR Kyushu Shareholders

Fir Tree Partners submitted a shareholder proposal nominating me as an outside board director for JR Kyushu. This all began as Fir Tree, the largest and longest holding, active shareholder of JR Kyushu since its IPO, was working in dialogue with the Company to find suitable new board candidates. I accepted the nomination because I believe the current needs of the JR Kyushu board fit well with my previous professional experience as well as my knowledge base. In particular, my experience as both analyst and corporate executive should be helpful as I am in favor of dialogue between investors and companies.

In mid-April, I was surprised to learn that JR Kyushu management, after spending months screening and interviewing the various candidates, ultimately decided to reject all candidates that were under consideration with Fir Tree. At this time, Fir Tree asked us to be their shareholder candidates for this year’s annual meeting. Even though being elected to a board as a shareholder proposal candidate is still rare in Japan, I decided to accept the role because I feel strongly about the importance of good governance and the role of completely independent outside directors. As I learned more about JR Kyushu in the past few months, I have concluded that I can add to the JR Kyushu board the diversity, perspective, and expertise that I have developed as an analyst, fund manager, investor relations professional and corporate executive in charge of governance matters. To this end, I believe I can help JR Kyushu in addressing the current challenges caused by Covid-19 as well as fulfill its full potential.

I would also like to publicly state that I am completely independent from Fir Tree and have told them directly that at all times. Fir Tree approached me through the help of a third-party search firm. I previously knew nobody at Fir Tree. There is no financial arrangement between us. I will remain independent from Fir Tree should I be elected as a director of JR Kyushu. I will consider Fir Tree’s opinions as no more or less important than those of any other shareholder, large or small.

If elected to the JR Kyushu board, I would be completely open minded and unbiased. I would review all board matters carefully in consultation with the other board members, management, and shareholders utilizing both public and non-public information in order to form my own opinions. I would endeavor to make well informed decisions that are best for all stakeholders.

Example of UK Pension Voting Policy – Japan Still Has Far to Go

The London Borough of Camden Pension Fund recently updated its voting guidelines. I thought it might be interesting for Japanese readers to see how detailed such guidelines by foreign pension funds are.  It is interesting to note that if you applied these voting criteria to most Japanese companies, almost none of them would pass muster, and the result we would be that many resolutions (and many directors) would not be approved.  Japan is still far, far behind the level of “stewardship” and expected governance practices in many other countries.

London Borough of Camden Voting Guidelines 2020

Very few pension funds in Japan (none that I know of) have voting policies at anything near this level of detail.