ENGAGEMENT CASE STUDY
Japan Governance: A Small Cap Company’s Big Step Forward
Background: Japan is undergoing significant corporate governance reforms, with the revision of its governance code in 2021 and the introduction of new requirements to occupy the preferred TSE Prime section of the Tokyo Stock Exchange. Many large companies are well prepared for this transition, but many smaller companies are working hard to catch up. As part of our focus on improving corporate performance around sustainability, we have had a receptive audience for our ideas. One example is the operator of a small Japanese company that runs the country’s largest press release distribution platform, which faced conflict of interest issues based on its majority ownership by a large technology company. Scope and Process: Since April 2020, we have engaged with the company on a number of key issues, including corporate governance (board independence and diversity), capital management (share liquidity) and material equity, environmental and safety issues. We started by meeting repeatedly with the company president, focusing on how the company could mitigate its conflict- of-interest issues. Moving into 2021, the discussion broadened to seek greater board independence in order to be aligned with the revised corporate governance code, which requires majority board independence or the creation of a special committee of independent directors and auditors, as well as the need to improve board diversity (there were no female directors at the time). We also addressed the company’s liquidity, noting that it fell short of the 35% “free-float” share requirement needed to meet new listing requirements starting in April 2022. Outcome and Outlook: In September 2021, the company announced that it would apply to become a member of the stock exchange’s TSE Prime section, and introduced a plan to be in compliance with the revised corporate governance code. It also announced the retirement of a board member from the parent company, replacing him with a female external director with strong management and board experience—still a rarity in Japan. In addition, the company negotiated a partial sale of the parent company’s ownership stake, allowing the company to meet exchange requirements. Looking ahead, the next step will be to accelerate dialogue with the company around the mid- to long-term capital relationship with its parent and to strengthen measures around the protection of minority shareholder value in the event the company makes a final decision on its capital structure. In the interim, we will also be holding more concrete discussions on addressing material issues tied to cybersecurity, human capital management and responsible marketing.
ISSUE Board Independence and Diversity, Capital Management
CATEGORY Governance, Social
STRATEGY Japan Equity
SECTOR Media/Technology
KEI OKAMURA Director of Japan Investment Stewardship
2021 ESG ANNUAL REPORT
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