Holding management to account


Because public companies are owned by their shareholders, any time they convene is when key corporate decisions are made.

These decisions include those pertaining to the payment of dividends, the appointment of directors and other matters, although not necessarily those regarding specific business operations.

This year, most shareholders’ meetings will be held this Friday, with 590 in Tokyo alone, the Metropolitan Police Department said.

Following are basic questions and answers about shareholders’ meetings:

When do shareholders’ meetings have to be held?

Under the corporate law, companies must convene shareholders’ meetings within three months of the end of their business year. Because most Japanese firms close their books on March 31, the meetings are usually held in late June. About 1,280 companies will assemble their shareholders in Tokyo this month.

What is discussed in the meetings?

The gatherings are chaired by the presidents, who issue financial statements for the most recent business year, earnings projections for the current year and discuss the company’s long-term plans. Shareholders also vote on dividend proposals, board members, directors’ pay and other matters.

Can shareholders issue proposals?

Those who have held at least a 1 percent stake in the company for six months or longer are eligible to make proposals. They must submit them to management eight weeks before the meetings, and the companies are required to respond at the gatherings.

The past few years have seen an increase in shareholder proposals. This is due partly to “activist” funds, both Japanese and foreign, that are pressuring management to raise corporate value and increase returns to investors.

The Murakami Fund, run by former bureaucrat Yoshiaki Murakami, was an activist fund. Its aggressive tactics helped inspire individual investors in Japan to become more vocal in holding management accountable for protecting their interests. But Murakami’s exploits finally went too far, and he was sentenced to a two-year prison term for insider trading last July.

What trends will prevail at this year’s meetings?

Hedge funds, criticized for investing in or taking over companies to produce short-term profits rather than long-term gains, appear to be taking a break from shareholders’ meetings this year.

U.S.-based Steel Partners, one of the most aggressive hedge funds, last year filed proposals to fire board members and take other drastic measures at Sapporo Holdings Ltd., Bull Dog Sauce Co. and dozens of other companies. It was repeatedly shot down.

This month, Steel will probably refrain from these tactics, said Yoji Yoshioka, president of Japan Proxy Governance Inc., which provides reports on Japanese companies to foreign investors.

Since other funds are not likely to be as aggressive either, there is expected to be a drop in shareholder proposals this year.

However, many institutional investors, especially foreigners, held negotiations before this year’s shareholders’ meetings, indicating management is becoming more aware of their clout, Yoshioka said.

Another trend will likely be an increase in proposals aimed at preventing hostile takeover bids. Although Japanese companies have been criticized for being overly protective by foreign investors as well as the government itself, many feel emboldened by last year’s Supreme Court ruling that upheld Bull Dog Sauce’s poison pill against Steel Partners.

The court said it is legal to take such defensive actions, which leave takeover-minded investors at a disadvantage and are perceived as serving only the self-preservation interests of management.

Which shareholders’ meeting is likely to grab the most attention this year?

Electric Power Development Co. (J-Power) will definitely be the highlight of this year’s crop.

J-Power’s largest shareholder, The Children’s Investment Fund (TCI), which has a stake of 9.9 percent, has asked other shareholders to give it proxy voting rights on seven proposals, including limiting cross-shareholdings with banks and business partners, adding external board members and raising dividends. The meeting will be held Thursday.

The U.K.-based hedge fund also drew attention when the government rejected its request to raise its stake from 9.9 percent to 20 percent in April, citing a potential threat to national security. The move prompted financial markets to question Japan’s willingness to open up to foreign investment.

Why do so many companies meet on the same day?

To keep demands and disruptions to a minimum, hundreds of companies meet on the same day to prevent people who have invested in multiple companies from attending all of the meetings. Companies, and hence their leaders, can thus reduce the chance of being troubled or embarrassed by demanding or annoying shareholders.

The most notorious of these are “sokaiya,” corporate extortionists who take advantage of the minimum stake needed to attend the meetings, often one share, to blackmail companies by threatening to disrupt or drag out the meetings, or go public with embarrassing revelations.

Sokaiya are the main reason for holding shareholders’ meetings en masse on the same day, and police are often on hand to thwart their activities.

Why do sokaiya exist?

Sokaiya can be both friends and enemies. If a company is involved in a scandal, angry shareholders can confront board members and stretch the meetings out for hours.

Sokaiya, who are often associated with yakuza, can disrupt meetings by attacking management with pointed questions or by dominating the floor, sometimes by stocking the front row with their own ranks. This keeps legitimate shareholders from airing their own grievances or applauding a company’s proposals.

One famous sokaiya trial involved an advertising scandal at Toyo Denki Seizo K.K., a maker of color televisions. Toyo Denki Seizo was accused of running a false ad campaign claiming it developed cheap color TVs.

In 1962, the company asked sokaiya to suppress angry shareholders at its meeting. This resulted in the arrest of the sokaiya and some of the company’s executives for alleged bribery. Although they were acquitted by a district court, a high court later convicted them in a ruling that was upheld by the Supreme Court.

The incident prompted a change in regulations. The law prohibiting companies from paying off sokaiya or other parties for using shareholder rights in favor of the firm was enacted in 1981. Sokaiya activities have tapered off dramatically since then.

However, sokaiya are still accused of pressuring companies to run costly ads in niche magazines or other publications and are resorting to other shady tactics to make money.

Do companies get anything positive from shareholders’ meetings?

More and more firms are treating their meetings as a critical event for improving investor relations, which is why fewer firms have been holding meetings on the same day — a trend that is likely to continue.

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