Constant Complaints

For decades, Japanese and foreign investors have complained about two things

(1) The fact that most annual general meetings (AGMs) are concentrated in June, with the majority occurring in the same week and a full 25% on the same day. This makes it extremely difficult for investors to prepare adequately or attend many of these meetings.

(2) Surprisingly, many Japanese companies file their most important disclosure documents, annual securities reports (the equivalent of a U.S. 10-K), after the shareholders’ meeting. This is a complete reversal of the original situation, where investors are unable to obtain essential information prior to the meeting and receive it only after the meeting.

(Last June, at the government’s request, a larger than usual number of companies filed their paid-in reports prior to the general shareholders’ meeting, but most of these were a week or less before the meeting. This is very limited progress, as many institutional investors have already voted at this point. In addition, the reality is that it takes more than a few days to scrutinize many of the paid reports.)

However, this problem is not difficult to solve.

Last June, Solacom and Advantest showed their shareholders the respect they should have received and amended their articles of incorporation to allow them to hold shareholder meetings after the end of June, for example, in July or August.

This will allow shareholders of both companies to avoid the “general meeting schedule concentration problem,” since shareholders of both companies will receive a notice at least one month before the general meeting and the general meeting will be held at a time when the general meetings of other companies are not concentrated.

This “solution” is quite simple. By law, a general shareholders’ meeting must be held within three months of the “record date” for determining voting rights. Therefore, the two companies changed the record date for voting rights to after March 31. Solacom and Advantest set the date to April 30 and May 15, respectively.

Very high approval rate at both AGMs

At both companies’ general shareholders’ meetings, the approval rate for proposals to amend the articles of incorporation was very high. At Solacom, the rate was 99.71%, and at Advantest, 99.78%.

This is a high approval rate that is hard to obtain even for very capable CEOs who are reappointed.

Excellent opportunity for shareholder proposals that can be successful.

Usually, when an activist fund makes a shareholder proposal to change the articles of incorporation, the best it can get is a 20-30% approval rate with only symbolic significance. (“symbolic” because an amendment to the Articles of Incorporation requires a two-thirds majority of the voting power for passage).

In this case, however, if an institutional investor or activist fund were to propose a change in the articles of incorporation similar to that of Solacom and Advantest, there is a very good chance that it would pass. This is because dissatisfaction with the current system is a market-wide issue that many institutional investors have been professing for years.

A further constructive suggestion would be to require annual disclosure of director training and governance-related training (legal, governance, finance, etc.) provided to directors, executive officers, and directors of major subsidiaries in the previous year. Currently, many companies do little to engage in the training required by the Corporate Governance Code, and as a result, scandals continue to occur and average P/B ratios remain stagnant at around 1.4x despite the TSE’s cost of capital policy. Actual facts of action are more important than abstract “policy” statements. The only way to encourage action is to require disclosure of what was actually done in the previous year.

These two proposals are in the best interest of all shareholders and the proposer will be regarded as a very constructive shareholder.

Very difficult to oppose

What makes these two proposals effective is that, in combination, they are not only beneficial to both the corporation and its shareholders, but also very difficult to oppose. It must be very difficult for the company to find a reason to oppose the first proposal, and if it also opposes the second proposal, it may show itself to have no regard for the interests of shareholders or for any dialogue.

A reputable company would likely change to the “company proposal.”