Beyond Corporate Governance - What Is Expected of a Company in the Post Financial Crisis Era?

Beyond Corporate Governance -What Is Expected of a Company in

the Post Crisis Era? -

Nami Matsuko

Head of Corporate Citizenship Department

Nomura Holdings, Inc.

May 27, 2010

© Nomura Holdings, Inc.

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l. Current Discussion and Rule Changes on Corporate Governance

ll. Where Have We Come so far?

!(Case 1) Takeover Defenses

(Case 2) Independence on the Board

lll. What is expected in Post-Financial Crisis Era?

TOPICS

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I. Current Discussion and Rule Changes

on Corporate Governance

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Discussion at government level has started

* Please refer to next pages for topics covered

General General shareholders’ shareholders’

meetingmeeting

General General shareholders’ shareholders’

meetingmeeting

20102009 2008

June

companies

June JuneDec

METI Report Released * (17/6/2009)

March

MOJ/

DPJ

2011-12?

MOJ-led discussion

for company law

TSE

FSA

Report Released

(23/4/2009)

Rules for Board*

and Disclosure (30/12/2009)

Report Released * (17/6/2009)

Rules for Disclosure

(Governance, Cross-Shareholdings, Compensation etc)

Report Released (30/6/2009)

?UK Takeover

Rule

Study Group

Public Comments (19/5/2009)

Rules for Placing *

(24/8/2009)

DPJ – draft of new company law for

“listed companies”

(*Introduction of independence (*Introduction of independence needs to be completed in 2011)needs to be completed in 2011)

General General shareholders’ shareholders’

meetingmeeting

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Comprehensive Topics are covered

　 TSE (Listing Rules) FSA (FEIL) METI DPJ (MOJ)

Main body of discussion

Comprehensive Improvement Program

for Listing System

Financial System Council's Study Group for Strengthening the Competitiveness of

Japan's Financial and Capital Markets

Corporate Governance Study Group

Advisory Committee

(Feb. 2010 -- )

Themes

Third Party Share Issuance 　 (Placing)

Cash-Out via Reverse Stock

Proxy voting related matters, disclosure of voting results

Management Buy Out

(Takeover Defenses / Rights Plans)

Issues regarding Equity Finance / Capital Raising Third Party Share Issuance (Placing) Issuance of MSCB (Moving Strike

Convertible Bonds) Squeeze out of minority shareholders Subsidiary Listing Governance of Group Companies Corporate Governance (Structure of the

boards, Independence, Statutory Auditors)

Executive Compensation disclosure Proxy Voting, dialog between investors

and companies Cross-shareholdings (Defense Measures / Rights Plans)

Corporate governance structure

Independence of the Board (outside directors and statutory auditors)

Number of outside directors

Independence on the board

Employee Representatives on Statutory Auditors Board

Group related rules – protection of minority shareholders at parent company on actions at subsidiary level and vice versa

No subsidiary listing

Pre-emptive Right (Rights Issue?)

(M&A / TOB rules??)

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II. Where Have We Come so far?

(Case 1)Takeover Defenses

(Case 2) Independence on the Board

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Investors vs. “Corporate Japan”

Increase in Foreign Ownership

and

Decrease in Cross shareholdings

Decrease in Foreign Ownership

and

Slight Increase in Cross shareholdings

2009 ～

Mid 1990’s ～

2005 ～ 2007

Early 2000’s

～ Mid 1990’s

Has Confrontation been eased and Constructive dialog begun?

Changes in the attitudes of both Corporation and Investors were observed

Confrontation with activists and institutional investors has been intensified

Hostile takeover attempts and creeping share acquisitions

Proxy voting, shareholder proposals, direct communication

Adoption and Use of Rights Plans (Defense measures)

Confrontation with activists has begun

Hostile takeover attempts and proxy fights

Communication with institutional investors

IR activities

Response to “Sokaiya” shareholders (Corporate Mafia)

FINANCIAL CRISISFINANCIAL CRISIS

Corporate Governance Rule Changes

Are rules (substantial and disclosure) comprehensive enough?

Do rules serve the purpose? What were to be changed?

Dilution caused by Equity financing / large scale public offering

Investors coming back to

Japanese Market?

～ 2008

NEXT step for Japanese companies is to gain investor confidence

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(Case 1) Takeover Defenses

6 10 9 8 3

140

560 563

10

362

0

50

100

150

200

250

300

350

400

450

500

550

600

J an　2005 J an　2006 J an　2007 J an　2008 J an　2009

Advance　Warning　Type

Trust　Type　Rights　Plan

number　of　companies（ ）

Newly adopted: 224 companies

Shift from Trust Type Rights Plan: 1 company

Cancellation: 3 companies

Newly adopted: 131 companies

Shift from Trust Type Rights Plan: 2 companies

Cancellation: 3 companies

Newly adopted: 206 companies

Shift from Trust Type Rights Plan: 1 company

Cancellation: 9 companies

About 5% of all listed companies

About 10% of all listed companies

About 15% of all listed companies

Newly adopted: 22 companies Shift from Trust Type Rights Plan: 5

companies Cancellation: 22 companies

eAccess

Shiseido

WORKS APPLICATIONS

MORITEX

ROHM

Riken Vitamin

EZAKI GLICO

Aderans Holdings…

June June June June June

More and more companies drop takeover defense measures

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(Case 2) Independence on the Board

Minimum standards for governance would help to recover

investor confidence.

Change in governance may deter problems/scandals to occur.

Independent directors may be well positioned to understand

and monitor the long term policies of companies such as R&D

which is necessary for sustainable long term growth.

Independent directors should act for the interest of minority

shareholders who are not represented by anyone otherwise.

Statutory Auditor system serves its purpose, but their authority is

limited (no voting right at board meetings, etc)

The role of outside directors is not to give opinions and

advice based on industry specific expertise.

Supporting Opinion

Corporate governance should be left to the decision of each company.

Chance in governance structure does not enhance corporate

performance and could not prevent financial crisis in US.

Directors in Japan, inside or outside, are not working solely for

minority shareholders but for all stakeholders, and outside

directors are not be motivated to work for them.

Statutory Auditors provide monitoring function through their

participation in the board meeting in their capacity to “audit” the

legality of the board action, including the discharge of fiduciary duties.

Outside directors without industry specific expertise can not give

sound business advice to the board as expected.

Why should governance issues be prioritized in the face of financial

crisis?

Dissenting Opinion

Expected roles of independent directors perceived by corporations and investors (and among investors) are not the same. Independence from the management/executives in order to protect minority shareholders by solving conflict issues?

e.g. Stance towards hostile takeover, Activation of poison pills, MBO/Privatization, Listed subsidiary Advice to the management on compliance and financial (cost of capital, dividend / repurchase policy) to minimize downside

risk? Advice to the management based on industry and technology to increase value of the company and to maximize upward

return? Independence either on Board of Directors or Statutory Auditors is required >>> should the same role be expected?

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(Case 2) Independence on the Board

How can we make it work?

　 IndependentCommittee

Plans adopted / activated by

Outcome

Hokuetsu vs. Oji Paper(2006)

Yes (3, non-business related)

No outside directorsBoard

Independent committee recommended to activate the plan.Board decided not to issue rights but undertook "private placement"

Bulldog vs. SP(2007)

N.A.Shareholders

(after tender offer was launched)

Shareholders approved the activation and the dilution was caused. SP received cash as economic compensation.

Sapporo vs. SP(2007 ～ 2009)

Yes (3 from business and

academic)Outside directors present

Board Shareholders⇒

After Q&A period (8 months) and board examination period (2 months), Independent committee and Board concluded that SP would cause damage to shareholder value (2008). SP withdraw takeover proposal, and Renewed rights plan was approved by shareholders(2009).

※ Renewed rights plan approved by shareholders in 2009 has a provision to limit the time for Q&A and board examination period.

Toyo Denki vs. Nidec(2008)

Yes (3 from lawyer, academic and outside

statutory auditor)No outside directors

Board On the closing of Q&A period (3 months) and before the start of board examination period, Nidec dropped its proposal.

Cases in which the activation of Rights Plans was deliberated at “Independent Committees”

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III. What is Expected in Post-Financial Crisis Era?

Corporate governance through capital market mechanisms has been recognized as a "means" to ultimately enhance shareholder value.

In recent years, new rules and regulations for market-driven corporate governance have been introduced in Japan and other Asian countries, albeit with different timetables and content.

Unfortunately, compliance with these rules is sometimes seen as more of an "end" than a "means".

In this post-financial crisis era, re-thinking and re-designing corporate governance in a broader context including an ESG and CSR viewpoint may be a good start for all stakeholders - including shareholders - whose ultimate common goal is enhanced corporate value.

Re-definition or Fiduciary Duties on the side of investors and sponsors is also crucial to advance corporate governance which should be the basis for sustainable growth of companies.