Parent-subsidiary listings under closer scrutiny of Japanese investors

Companies listed on stock exchanges along with their subsidiaries have come under closer scrutiny by investors due to continuing concerns over corporate governance.

Such listings serve a dual purpose for parent companies, as they can maintain their influence over subsidiaries and at the same time generate profits from the sale of some of their shareholdings in the units. But investors have questioned the independence of such listed subsidiaries.

For listed subsidiaries, remaining under the auspices of their parent companies contributes to management stability, which in turn can help sustain morale and boost the hiring of capable workers.

As listed companies, both a parent and a subsidiary have multiple ways of raising funds and can pursue faster growth as a corporate group.

In July, SoftBank Group Corp. filed a preliminary application to the Tokyo Stock Exchange for approval of the listing of mobile phone subsidiary SoftBank Corp.

Increased awareness of sound corporate governance has highlighted disadvantages in dual listings of parents and subsidiaries, however. The drawbacks sometimes outweigh the benefits.

If a subsidiary is forced by a company with a controlling stake in it to do business on unfavorable terms, the rights of minority shareholders in the subsidiary can be impaired.

Institutional investors are looking closely at companies’ independence from their parents. In December 2017, Sumitomo Mitsui Trust Bank came up with guidelines requesting that at least one-third of listed subsidiaries’ boards of directors be outside directors.

When Nisshin Steel Co., a subsidiary of Nippon Steel & Sumitomo Metal Corp., failed to meet the guidelines this year, Sumitomo Mitsui Trust voted against a proposal to reappoint all 10 directors at Nisshin Steel.

Dual listings of parents and subsidiaries may contravene the principle of fairness of shareholder rights as set out in the TSE’s corporate governance guidelines, so the exchange carefully examines listing applications to check whether mechanisms and operations are in place to enable management independence from parent companies, an official said.

Requirements for high levels of internal controls mean higher costs for maintaining dual listings of parents and subsidiaries, and the number of businesses ending such listings may increase.

According to the Nomura Institute of Capital Markets Research, the number of companies involved in dual listings stood at 263 at the end of March, down 40 percent from the peak of 417 in March 2007.

“Some companies are reviewing their parent-subsidiary listings in an effort to lift corporate values by a strategy of selection and concentration,” said Kengo Nishiyama, chief researcher of the institute. “The number (of such listings) will likely continue to fall.”