The PNC Financial Services Group, Inc. (NYSE: PNC) is one of a few financial companies that remains unscathed from the ongoing financial crisis. According to its recent 10K, in fiscal 2007, PNC incurred $48M in losses for mortgage loan portfolio repositioning, compared with $143B in annual revenue. The company said only 2% of the company’s asset is tied to subprime mortgages.
It is not easy for an outsider to determine why PNC has such little exposure to the once-highly rewarding subprime and asset-backed securities markets. However, a quick review of PNC’s regulatory filings gives some clue. PNC’s remuneration policy is comprehensive. Risk management and the quality of corporate governance factor in the determination of executive compensation. Since fiscal 2006, executive incentive pay has been tied to not only such financial goals as EPS and ROCE growth, but also non-financial metrics as operating leverage, diversification and risk and governance ratings.
What really sets PNC apart from other financial firms is that the company has been putting serious efforts into meeting this set of long-term nonfinancial goals, instead of changing them as many financial companies did almost as a matter of expediency. PNC appears to remain immune to the current crisis because it has a strong governance culture committing directors and executives to implementation of strong, well-balanced policies.
Tuesday, April 28, 2009
Thursday, April 16, 2009
South Korea: Summary of Current Shareowner Rights
[I wrote the first draft of the following piece in May 2008. In April 2009, it was published in Shareowner Rights across the Markets: A Manual for Investors, a joint project by Governance Metrics International and The CFA Institute Centre for Financial Market Integrity. The manual can be downloaded at http://www.cfapubs.org/toc/ccb/2009/2009/2?cookieSet=1]
Shareowner engagement in South Korea is often hindered by the country's conglomerates, whose circular, complex networks of cross-holdings shield them from market disciplines. Shareowner activism is also hindered by the country's regulatory ambiguities, which often undermine shareowners' abilities to fully exercise their rights. A prevailing management structure that fosters the infrequent placement of independent members on company boards further weakens shareowner rights in this market. Despite these obstacles, shareowners in the South Korean market hold considerable rights.
-. Current Engagement Practices and Shareowner Rights Developments
Although shareowner engagement in South Korea has evolved rapidly, political factors and other influences have prevented fully realized shareowner rights. The issue of shareowner engagement has traditionally been treated as political, and considerable focus remains on the omnipresent financial and political influence that the country's family-controlled conglomerates, or chaebols, exert on society.
The issues of shareowner engagement and corporate governance entered public debate in 1998, when South Korea began restructuring the chaebol system under the International Monetary Fund's mandate. As a result of this activity, public companies improved the accountability of their boards by substantially reducing board sizes and by seating board members from outside the chaebol on their boards. Most restrictions on foreign ownership also were removed. In 2001, People's Solidarity for Participatory Democracy (PSPD), one of South Korea's largest civic groups, took advantage of this opening and started a minority shareowner campaign. With a mere 1 percent of voting stock, PSPD activists challenged management at the shareowner meetings of Samsung Electronics, SK Corporation, and others, thus bringing the issues of shareowner rights and activism to media attention. Although its five-year campaign failed to bring specific improvements to the governance of the chaebol companies that it targeted, PSPD's high-profile efforts have sustained public debate about the issues of shareowner rights and activism.
PSPD had largely discontinued the campaign by 2006, and in late 2006, Jang Ha-sung, one of the two college professors who led the campaign, began to work as an adviser to Lazard's Korea Corporate Governance Fund, the first such fund formed by a foreign entity. Kim Sang-jo, the other professor, began to lead Solidarity for Economic Reform, a governance and regulatory reform advocacy group that involved some former supporters of PSPD. The divergent routes of these leaders marked a shift away from the public perception that shareowner engagement is primarily a social justice issue.
In South Korea, shareowner engagement is hampered by the absence of a strong local advocate. Local engagement consultants have begun to emerge, but their influence appears marginal. Policymakers have long proposed using the National Pension Service (NPS) as a vehicle for shareowner engagement. For example, in March 2008, the NPS, which currently invests KRW14.5 trillion (USD14.5 billion) in local stock exchanges, said it would vote against appointing the founders of Hyundai Motor Company and Doosan Infracore as board members because of their involvement in financial scandals. This move was a first-of-its-kind shareowner engagement by the fund. Furthermore, new legislation planned for 2009 that will allow brokerages to conduct banking business suggests that the landscape of shareowner engagement in South Korea will change yet again. Once brokerages become full-fledged investment banks in South Korea, the need to articulate shareowner rights and engagement practices will be even greater.
In South Korea, regulatory inadequacies often impede both the formation of independent corporate boards and the improvement of shareowner engagement practices. South Korean regulations require that 50 percent of the board of a public company with KRW2 trillion (USD2 billion) in market value be independent; for a public company with less than KRW2 trillion, at least 25 percent of the board's members must be independent. The regulations do not explicitly define the term "independent," however, and the terms "independent director" and "outside director" are used interchangeably. The materiality threshold for related-party transactions is set at KRW5 billion (USD50 million), and no materiality/time threshold has been set for professional/personal services provided by outside board members. These unclear rules cumulatively result in corporate boards that tend to be far less independent than the companies claim them to be. Board member elections are often staggered because many board members are elected to two- or three-year terms on different schedules, although practice varies. New board members may be appointed to fill vacancies between annual general meetings, but they must stand for election by shareowners at the next available general meeting (annual or extraordinary).
In South Korea, takeover rules are modest. Poison pills are not allowed, although talk of introducing them has been going on since 2006. Shareholdings that enmesh chaebol affiliates into a web of cross-shareholdings greatly hamper the market mechanism of takeovers. The complex networks of cross-shareholdings, further strengthened by routine related-party transactions between chaebol affiliates, seriously reduce the exposure of the conglomerates to market disciplines.
-. Legal and Regulatory Framework
Key shareowner rights are stipulated in three pieces of legislation: the Company Law, the Commercial Code, and the Securities Trade Law. Legislation is administered by the Financial Supervisory Service (FSS), which has a wide range of enforcement powers. Disclosure and key market regulations are governed under the Securities Exchange Listed Company Regulations, which has legislative backing. The FSS oversees the enforcement of takeover rules and regulatory disciplines but has no criminal enforcement authority.
A number of mechanisms are available in South Korea for shareowner engagement and activism. The one share, one vote system is generally entrenched, and some restrictions are in place to hold the influence of chaebols in check. South Korea's anti-monopoly and fair trade regulations restrict the voting rights of the financial and insurance units of the conglomerates with KRW5 trillion (USD5 billion) in market value connected with the shares they own in other units of the same conglomerates. Their voting rights are reinstated but with a 30 percent voting power ceiling, regardless of the number of shares they own, when they vote on such key issues as mergers and acquisitions or amendments to the articles of incorporation. As of June 2008, the restrictions affect 1,003 affiliates of 41 conglomerates. The Securities Trade Law imposes a voting cap of 3 percent in the election of audit committee or audit board members.
A request for an extraordinary general meeting or a shareowner proposal may be made by a shareowner holding a minimum of 3 percent of the voting shares for companies with less than KRW10 billion (USD10 million) in capitalization or holding 1.5 percent of shares for companies with more than KRW10 billion (USD10 million) in capitalization.
Shareowners may appoint proxies for general meetings without restrictions and are not required to block shares in order to vote. Board members may be removed without cause with a supermajority vote of shareowners or of the board. On 3 February 2009, the Capital Markets Integration Act took effect. It lowers regulatory walls between banks and non-banking financial institutions. The act was designed to realign the financial industry by encouraging mergers and acquisitions, but it may take some time for this change to come to fruition because of the global financial crisis and the limited amount of capital available for acquisitions in the current environment.
Another bill in the parliament would affect shareowners' rights through amendments to the Commercial Code. Ongoing gridlock in the legislature, however, has slowed the progress of this bill. The amendments, if passed, offer mixed results for the future of shareowner engagement. Some proposals could help weaken the one share, one vote principle by allowing shares with differing voting rights; other proposals are designed to make it easier for shareowners to take such actions as calling special meetings or filing derivative lawsuits. In conjunction with the amendment, the lack of a national consensus on whether chaebols should be allowed to own controlling stakes in lending institutions offers another point of political contention.
Thursday, April 9, 2009
Chronicle of A Death Foretold II
A handful of AIG executives took home $165 million in bonuses last year, when their company was bailed out with about $170 billion of taxpayers’ money. This revelation has caused public anger and controversy over executive compensation. Indeed, the U.S.’s compensation culture, which encourages executives to take risk with little concern of accountability, has precipitated the current financial crisis. Compensation is about rewards and accountability. And without accountability, compensation will be tantamount to fraud. In this respect, fiscal 2006 was the crucial year, when the country’s banks continued to ease their remuneration practices in a desperate move to stay on the gravy train, which, fueled by subprime mortgages and CDOs, began to turn the last corner of its collision course.
-. Washington Mutual, Inc.
In fiscal 2006, Washington Mutual, Inc. removed a regulatory-compliance goal from its set of bonus metrics. With the connivance of the board, Washington Mutual executives have since maneuvered to keep their jobs and bonuses, instead of taking on the credit crunch head-on. Two decisions in April 2008 by the board prompted shareholder action. In the month, the Human Resources Committee decided to exclude subprime mortgage-related losses from the metrics for executive bonuses. Washington Mutual passed up merger negotiations with JPMorgan Chase & Co in favor of $7 billion in capital injections from a consortium led by private equity TPG. A merger between the two financial institutions, which is about the size of the capital infusion in value, could have greatly improved shareholder interests at Washington Mutual, while the deal with TPG has diluted existing shares.
At the AGM in 2008, Washington Mutual shareholders had little option but to approve the plan because it was the only recapitalization plan put before them. However, they successfully unseated Mary E. Pugh, the non-independent outside director, who chaired the board committee responsible for asset quality, and had the board retract its decision to exclude subprime losses from bonus calculations. Shareholders could not stop executives from taking home hefty paychecks until the bank’s last days. In September 2008, Washington Mutual agreed with Alan H Fisherman, the new CEO replacing Kerry Killinger, to pay a salary of $1 million and 3.65 times base salary in bonuses and other cash and stock payouts. About 18 days after Mr. Fisherman’s appointment, the bank collapsed and was eventually acquired by JPMorgan Chase & Co, following a brief takeover of its assets by the federal government.
-. IndyMac Bancorp, Inc.
In fiscal 2006, at IndyMac Bancorp, Inc., the board’s Management Development and Compensation Committee gave up the right to reduce the amounts of executive bonuses if regulatory ratings worsened or if certain strategic criteria were not met. In the same year, 45% of IndyMac Bank’s CEO Richard H. Wohl’s cash bonus was tied to a single metric vaguely termed “mortgage professionals.” The metric appears to have referred to as Mr. Wohl’s ability to hire and retain mortgage professionals.
As late as fiscal 2006, IndyMac’s compensation metrics included many pro-shareholder factors such as ROE and TRS. In fiscal 2007, when its stock began to fall substantially, the bank scrapped all existing metrics, in what it said is to weigh “IndyMac’s pay for performance principles against the need to motivate and retain the management team to successfully adapt IndyMac’s business to the new mortgage environment and to rebuild IndyMac’s business and financial model.” In other words, the bank renounced the bedrock principles of compensation policy to retain the very management team that pushed it into crisis. In that year, all named executives were paid bonuses. In July 2008, IndyMac became nationalized after extensive financial losses.
-. Washington Mutual, Inc.
In fiscal 2006, Washington Mutual, Inc. removed a regulatory-compliance goal from its set of bonus metrics. With the connivance of the board, Washington Mutual executives have since maneuvered to keep their jobs and bonuses, instead of taking on the credit crunch head-on. Two decisions in April 2008 by the board prompted shareholder action. In the month, the Human Resources Committee decided to exclude subprime mortgage-related losses from the metrics for executive bonuses. Washington Mutual passed up merger negotiations with JPMorgan Chase & Co in favor of $7 billion in capital injections from a consortium led by private equity TPG. A merger between the two financial institutions, which is about the size of the capital infusion in value, could have greatly improved shareholder interests at Washington Mutual, while the deal with TPG has diluted existing shares.
At the AGM in 2008, Washington Mutual shareholders had little option but to approve the plan because it was the only recapitalization plan put before them. However, they successfully unseated Mary E. Pugh, the non-independent outside director, who chaired the board committee responsible for asset quality, and had the board retract its decision to exclude subprime losses from bonus calculations. Shareholders could not stop executives from taking home hefty paychecks until the bank’s last days. In September 2008, Washington Mutual agreed with Alan H Fisherman, the new CEO replacing Kerry Killinger, to pay a salary of $1 million and 3.65 times base salary in bonuses and other cash and stock payouts. About 18 days after Mr. Fisherman’s appointment, the bank collapsed and was eventually acquired by JPMorgan Chase & Co, following a brief takeover of its assets by the federal government.
-. IndyMac Bancorp, Inc.
In fiscal 2006, at IndyMac Bancorp, Inc., the board’s Management Development and Compensation Committee gave up the right to reduce the amounts of executive bonuses if regulatory ratings worsened or if certain strategic criteria were not met. In the same year, 45% of IndyMac Bank’s CEO Richard H. Wohl’s cash bonus was tied to a single metric vaguely termed “mortgage professionals.” The metric appears to have referred to as Mr. Wohl’s ability to hire and retain mortgage professionals.
As late as fiscal 2006, IndyMac’s compensation metrics included many pro-shareholder factors such as ROE and TRS. In fiscal 2007, when its stock began to fall substantially, the bank scrapped all existing metrics, in what it said is to weigh “IndyMac’s pay for performance principles against the need to motivate and retain the management team to successfully adapt IndyMac’s business to the new mortgage environment and to rebuild IndyMac’s business and financial model.” In other words, the bank renounced the bedrock principles of compensation policy to retain the very management team that pushed it into crisis. In that year, all named executives were paid bonuses. In July 2008, IndyMac became nationalized after extensive financial losses.
Wednesday, April 8, 2009
Chronicle of A Death Foretold I
• Between 1992 and 2007, the U.S. current account deficit increased by more than 1,300%. During the same period, China’s current account surplus increased by over 5,700%, as did the surplus for the oil exporting nations.
• The growth in foreign capital had a profound effect on the global economy. Foreign holdings of U.S. government and corporate debt skyrocketed. China’s monthly average purchases of U.S. long-term securities went from less than $2 billion in 2001 to over $15 billion in 2007.
• In the U.S., mortgage origination as a percentage of total mortgage debt outstanding rose from an average of 6.3% between 1985 and 2000 to 10% between 2001 and 2006. Subprime debt, in particular, grew from just over 2% in 2002 to 14% in 2008. In a sustained environment of cheap capital, lending standards for residential mortgages simply deteriorated.
• In January 2008, there were 12 triple A-rated companies in the world. At the same time, there were 64,000 structured finance instruments, like CDO tranches, rated triple A.
Source: http://www2.goldmansachs.com/ideas/public-policy/lcb-speech-to-cii.html
• The growth in foreign capital had a profound effect on the global economy. Foreign holdings of U.S. government and corporate debt skyrocketed. China’s monthly average purchases of U.S. long-term securities went from less than $2 billion in 2001 to over $15 billion in 2007.
• In the U.S., mortgage origination as a percentage of total mortgage debt outstanding rose from an average of 6.3% between 1985 and 2000 to 10% between 2001 and 2006. Subprime debt, in particular, grew from just over 2% in 2002 to 14% in 2008. In a sustained environment of cheap capital, lending standards for residential mortgages simply deteriorated.
• In January 2008, there were 12 triple A-rated companies in the world. At the same time, there were 64,000 structured finance instruments, like CDO tranches, rated triple A.
Source: http://www2.goldmansachs.com/ideas/public-policy/lcb-speech-to-cii.html
Wednesday, December 3, 2008
Samsung Quietly Demands Regulatory Changes to Keep Its Governance Intact
Samsung Group, South Korea’s largest chaebol (family-controlled conglomerate), is quietly requesting regulators, policymakers and legislator that holding-company regulations be amended in a fashion that will leave the current governance of Samsung Electronics Co., Ltd (KSE: 005930) intact, daily Hankyoreh reported on Dec. 3.
"I have learned that Samsung has been contacting the Finance Committee of the National Assembly, the Fair Trade Commission and lawmakers of the governing Grand National Party to rewrite a bill to exempt Samsung Electronics from some clauses governing holding companies,” a government source said on condition of anonymity.
Currently Samsung Life Insurance Co., Ltd., the mutual insurer of the conglomerate, owns about 7.2% of Samsung Electronics common stock and is the largest shareholder of Samsung Electronics. The insurer is majority held by the founding Lee family and Everland Samsung, the amusement park operator, which is the backbone of the conglomerate’s complex web of cross shareholdings. The conglomerate’s shift to a holding company would mean that the insurer will be a subsidiary of Samsung Everland and that Samsung Electronics will be a subsidiary of the insurer.
The current regulations do not allow a financial unit of a chaebol to directly own a non-financial unit of the same chaebol. A legislation bill, which is currently under consideration at the National Assembly, also places ownership restrictions on financial units of chaebols regardless of whether they own stakes in non-financial units as part of cross shareholdings or as part of a holding company. Samsung wants the restrictions relaxed or removed. Samsung Group denied Hankyoreh’s exclusive report as groundless, citing that there have been no group-wide lobbying efforts for the amendment bill. However, a Samsung spokesperson said: “However, legal counsels or strategic planners of each affiliate [of Samsung Group] can express their opinions about the bill.”
Translated and edited by Kap Seol
"I have learned that Samsung has been contacting the Finance Committee of the National Assembly, the Fair Trade Commission and lawmakers of the governing Grand National Party to rewrite a bill to exempt Samsung Electronics from some clauses governing holding companies,” a government source said on condition of anonymity.
Currently Samsung Life Insurance Co., Ltd., the mutual insurer of the conglomerate, owns about 7.2% of Samsung Electronics common stock and is the largest shareholder of Samsung Electronics. The insurer is majority held by the founding Lee family and Everland Samsung, the amusement park operator, which is the backbone of the conglomerate’s complex web of cross shareholdings. The conglomerate’s shift to a holding company would mean that the insurer will be a subsidiary of Samsung Everland and that Samsung Electronics will be a subsidiary of the insurer.
The current regulations do not allow a financial unit of a chaebol to directly own a non-financial unit of the same chaebol. A legislation bill, which is currently under consideration at the National Assembly, also places ownership restrictions on financial units of chaebols regardless of whether they own stakes in non-financial units as part of cross shareholdings or as part of a holding company. Samsung wants the restrictions relaxed or removed. Samsung Group denied Hankyoreh’s exclusive report as groundless, citing that there have been no group-wide lobbying efforts for the amendment bill. However, a Samsung spokesperson said: “However, legal counsels or strategic planners of each affiliate [of Samsung Group] can express their opinions about the bill.”
Translated and edited by Kap Seol
Tuesday, April 8, 2008
Spotlight: Samsung Electronics (July 24, 2007)
Originally published in the July 24, 2007 issue of In Focus, Governance Metrics International’s newsletter.
Spotlight: Samsung Electronics
South Korea’s most famous blue chip company, Samsung Electronics, has suffered a spectacular decline in value over the last two years. While the KOSPI composite index rose by 27 percent over the last year, Samsung’s shares fell 4 percent. Samsung used to dominate the Korean exchange with 25 percent of its total market capitalization. Today, Samsung accounts for only 8 percent of the market capitalization of the Korean bourse.
Governance is an issue here. Although the company blames the usual culprits of low-cost competition from China and irregular dynamics in the memory chip market, Samsung’s problematic governance is a likely additional drag on share price performance. GMI currently rates Samsung 2.0 on a scale of 1.0 to 10.0, with 10.0 being the highest relative to other emerging market companies, and 1.5 globally. GMI also has flagged the company in three out of six research categories.
Samsung’s governance structure is marked by a web of cross-holdings which ensure the control of the Lee family over the Samsung conglomerate. The Lees’ influence was evident in January 2007, when the company appointed Lee Jae-yong, the 39-year-old son of the family patriarch, to the newly created position of chief customer officer. The appointee’s prior business experience was a failed internet venture. In May 2007, the Seoul appeals court upheld the convictions of two executives of a Samsung affiliate for breach of their fiduciary duties because they helped Mr. Lee Sr. transfer control of the company to his children. These and other governance issues not only hamper the ability of outsiders to exercise control over the company, they also act as disincentives to challenge the company’s internal dynamics, which will be necessary to spur product and marketing innovations.
South Korea’s largest daily newspaper, Chosun Il Bo, quoted an anonymous Samsung executive on July 13 as saying that U.S. investor Carl Icahn might make a hostile takeover bid for the company. Samsung’s stock rose on this news, despite a 36 percent fall in quarterly operating profit announced the same day. On July 17, Icahn denied the report as “erroneous rumors.”
Spotlight: Samsung Electronics
South Korea’s most famous blue chip company, Samsung Electronics, has suffered a spectacular decline in value over the last two years. While the KOSPI composite index rose by 27 percent over the last year, Samsung’s shares fell 4 percent. Samsung used to dominate the Korean exchange with 25 percent of its total market capitalization. Today, Samsung accounts for only 8 percent of the market capitalization of the Korean bourse.
Governance is an issue here. Although the company blames the usual culprits of low-cost competition from China and irregular dynamics in the memory chip market, Samsung’s problematic governance is a likely additional drag on share price performance. GMI currently rates Samsung 2.0 on a scale of 1.0 to 10.0, with 10.0 being the highest relative to other emerging market companies, and 1.5 globally. GMI also has flagged the company in three out of six research categories.
Samsung’s governance structure is marked by a web of cross-holdings which ensure the control of the Lee family over the Samsung conglomerate. The Lees’ influence was evident in January 2007, when the company appointed Lee Jae-yong, the 39-year-old son of the family patriarch, to the newly created position of chief customer officer. The appointee’s prior business experience was a failed internet venture. In May 2007, the Seoul appeals court upheld the convictions of two executives of a Samsung affiliate for breach of their fiduciary duties because they helped Mr. Lee Sr. transfer control of the company to his children. These and other governance issues not only hamper the ability of outsiders to exercise control over the company, they also act as disincentives to challenge the company’s internal dynamics, which will be necessary to spur product and marketing innovations.
South Korea’s largest daily newspaper, Chosun Il Bo, quoted an anonymous Samsung executive on July 13 as saying that U.S. investor Carl Icahn might make a hostile takeover bid for the company. Samsung’s stock rose on this news, despite a 36 percent fall in quarterly operating profit announced the same day. On July 17, Icahn denied the report as “erroneous rumors.”
Tuesday, March 25, 2008
Two Issues on Japan’s Corporate Governance
Since the Meiji restoration of 1871, the Japanese have appeared to adopt political and economic changes on the terms and at the speed, with which at least their elite feels comfortable. In the absence of such social consensus, much-needed social changes often get stranded. The case in point: Corporate governance in Japan. Since a major improvement in governance disclosure and procedures in 2004, the Japanese elite has been still debating about the amount and urgency of governance reform, which often results in regulatory inadequacies and in a deterioration in a once-strong commitment to bettered governance.
For an outside Japan watcher, the Japanese industrialists learned a wrong lesson from the 2006 Livedoor fiasco. If there is any good lesson to learn from the scandal, it will be the importance of sound internal controls and regulatory oversight, not the need for often-poorly-justified takeover defenses against, in their words, “abusive investors” at home or abroad. Since 2006, an increasing number of Japanese companies have been adopting poison pills and/or entered into cross-shareholding alliances while investors have been voting with their feet on Japan’s preoccupation with defense measures. In 2007, the country’s bourse was the only Asian market to post a loss. The Nikkei fell more than 11%. What is more serious for Japan, the underperforming Japanese financial market would help other Asian cities, such as Shanghai, Hong Kong or Singapore, supplant Tokyo as the region’s financial hub.
However, much of the Japanese establishment appears to be behind Japanese corporations’ response to an often-exaggerated threat. On July 30, 2007, Tokyo High Court ruled in favor of Bull-Dog Sauce Co. by defining U.S. investment fund Steel Partners as "an abusive acquirer" and as a result, opened the way for Nisshinbo Industries Inc. to further strengthen cross shareholdings with Nisshin Seifun Group Inc. to thwart a further move to buy into Nisshinbo Industries by Steel Partners which controlled a 5% stake in the company.
All these prompted Tokyo President Atsushi Saito to warn that Japan’s capital markets would not develop” unless its companies give shareowners adequate information about their activities and ensure that their rights are protected. In a February monthly press session, Mr. Saito, one of a handful of reform advocates in Japan, raised concerns about reverse share splits and new hybrid loans which come with dilutive warrants that can be exercised in the event of an unwanted offer. However, what have allowed such a setback are regulatory inadequacies. Let us take a look at the issues of poison pills and cross shareholdings in Japan (parenthetically, regulatory oversight remains weak in Japan. I am attaching an AFP piece to the bottom of this paper to illustrate the point.)
-. Poison Pill
There are no rules or regulations directly governing poison pills in Japan. Companies usually follow the Defensive Measures Guidelines, which were written by the government almost exclusively for poison pills through the issuance of stock purchase warrants. Since the guidelines are not legally binding, it can be expected that there will be companies which will adopt poison pills that are tailored to address the particular issues associated with management’s needs. The aforementioned reverse share splits and new hybrid loans which come with dilutive warrants clearly represent an attempt by some Japanese companies to skirt the guidelines. The guidelines itself are often inadequate. For instance, the guidelines require the pills to be subject to the annual review of an independent ad hoc committee. However, the guidelines do not require the companies to demonstrate the independence of the third party committee through public disclosure. The companies do not usually disclose sufficient information to allow outsiders to evaluate the independence of the ad hoc committees.
Some poison pill plans feature a proviso allowing the ad hoc committee to activate the pill if it sees the bid as a threat to corporate and shareholder value or if the bid does not meet some – often unspecified -- criteria for the qualifying bid. While most Japanese poison pills follow the guidelines and feature TIDE provisions, some of the plans also authorize the ad hoc committees to renew the poison pills. Since most of these companies adopted poison pills in 2006-07, we have to wait for the next three years to find out whether these pills will be renewed by the committees or by shareholders. There are no downright dead-hands in Japanese poison pills yet, but they feature what would be called an invisible hand.
-. Cross shareholdings
A new round of cross-shareholding alliances in Japan has been often carried as a headline item in financial news outlets in the past two years. In the 1950s-80s, Corporate Japan resorted to cross shareholdings to retain a cozy relationship between financial institutions and their corporate clients. The cozy relationship worked because Japan, albeit a global industrial hub, was basically a locally grounded economy. Companies could be protected from international influence by a group of interlocking shareholders. The system began to crumble, following the collapse of the bubble which forced banks to sell their equity positions in their corporate clients. In the process, foreign ownership of Japanese shares rose to 28% in 2007 from 4.7% in 1990. With the rise of new foreign players in the capital market, Japanese corporations began to form cross-shareholding alliances between themselves, instead of financial lenders, to forestall unwanted takeover bids.
A 2007 study by the Daiwa Institute of Research, a research arm of Daiwa Securities, indicated that 5.6% of Japan’s bourse was locked in cross-shareholdings in fiscal 2006, at least 2.11% of which is between what local media dub “friendly [or stable] investors.” According to the study, three big corporations, Toyota Motor Corp. , Matsushita Electric Industrial Co. and Nippon Steel Corp., led the increase in cross shareholdings between friendly companies.
In response to what they described as a hostile takeover threat from Arcelor Mittal, Japan’s three steelmakers, Kobe Steel, Ltd., Nippon Steel Corporation and Sumitomo Metal Industries have since Oct. 2007 strengthened their cross shareholdings alliance. By the end of fiscal 2006, their cross shareholdings have involved into a circular shareholding arrangement that could be only found in Korea’s chaebol. In 2007, Nippon and Sumitomo respectively spent JPY 100B to boost Nippon's stake in Sumitomo Metal to 9% from 5% and Sumitomo's stake in Nippon to 4% from 1.81%. Sumitomo also controlled 5.1% of Nippon and 1.71% of Kobe. In February 2008, Sumitomo Metal agreed to issue JPY 49.6B worth of its shares to Sumitomo Corporation and to purchase JPY 15B worth of Sumitomo Corporation shares to strengthen their cross-shareholding ties. In the same month, Nippon Steel Sumitomo Corporation said they would will spend about $63 million apiece to raise their stakes in coke producer Mitsui Mining Co.
The ever-complex tripartite steel alliance may have more significant governance implications because it is not just meant to ward off hostile takeover bids, but also to better position the companies in the raw-material and the end market because it includes product-sharing and joint purchase arrangements.
It is also setting the tone for cross holdings in Asia’s steel industry. In 2006, South Korea’s steelmaker POSCO entered into a cross shareholding alliance with Nippon Steel. The two companies are currently implementing 14 R&D projects involving a total of 5K engineers on both sides of the Sea of Japan. Emboldened by its alliance with the Japanese steelmaker, POSCO in April 2007 decided to sell about 872K common shares, or 1% of treasury stock, to Hyundai Mipo Dockyard, a unit of the Hyundai Heavy Industries Group, and to buy a 1.9% stake in Hyundai Heavy Industries, the conglomerate's flagship unit, from Hyundai Mipo Dockyard Co., Ltd. With the stock swap, POSCO is now enmeshed in the complex web of circular shareholdings of the Hyundai Heavy Industries Group. Japan’s JFE Holdings Inc. and Korea’s Dongkuk Steel Mill Company Limited took the lead taken by Nippon and POSCO last year and formed a cross shareholding alliance.
Since they are often more than an excessive defense, the cross shareholdings weigh down on the companies’ shares. Since February, shares of Sumitomo Corporation fell more than more than 30%, incurring 16 billion yen in latent losses. Sumitomo Metal fell by 12%, Kobe 6% and Nippon Steel 11%.
Japanese firm rapped over Sony, Toyota 'acquisition' claims: official
27 January 200822:42
Agence France Presse
Japanese authorities have ordered a little known firm to correct its claim that it had bought controlling stakes in a clutch of corporate giants including Sony and Toyota Motor, officials said Monday.
Teramento Corp., reportedly capitalised at 1,000 yen (9.3 dollars), raised eyebrows on Friday as it announced "acquisitions", together worth 188 billion dollars, of majority stakes in some of the nation's leading companies.
It claimed it had bought 51 percent of Sony Corp., Toyota Corp., Nippon Telegraph and Telephone Corp. (NTT), Mitsubishi Heavy Industries Ltd., Fuji Television Network Inc. and Astellas Pharma Inc.
The company, which is registered in Kawasaki City near Tokyo and involved in IT and other businesses, made the claim in filings with the Financial Services Agency's electronic information disclosure system after the market close Friday.
The filings prompted the agency to launch a probe as the total value of the deals would be some 20 trillion yen (188 billion dollars), nearly one quarter of Japan's national budget.
The agency "judged the claim about the (acquisition of the) 51 percent stakes is false and ordered the company to correct its reports," said an inspector at the regional financial bureau supervising Kawasaki.
Teramento was ordered to correct the filings by 5:15 pm (0815 GMT) on Monday when the electronic disclosure system halts for the day, the official said.
The company had not submitted a correction as of late morning, he said, adding that failure to obey the order was punishable by imprisonment of up to one year or fines of up to one million yen.
The mass-circulation Yomiuri Shimbun quoted Teramento's representative as saying: "I run an IT company but live on doing part-time jobs. I didn't know what I filed would be made public as they are."
For an outside Japan watcher, the Japanese industrialists learned a wrong lesson from the 2006 Livedoor fiasco. If there is any good lesson to learn from the scandal, it will be the importance of sound internal controls and regulatory oversight, not the need for often-poorly-justified takeover defenses against, in their words, “abusive investors” at home or abroad. Since 2006, an increasing number of Japanese companies have been adopting poison pills and/or entered into cross-shareholding alliances while investors have been voting with their feet on Japan’s preoccupation with defense measures. In 2007, the country’s bourse was the only Asian market to post a loss. The Nikkei fell more than 11%. What is more serious for Japan, the underperforming Japanese financial market would help other Asian cities, such as Shanghai, Hong Kong or Singapore, supplant Tokyo as the region’s financial hub.
However, much of the Japanese establishment appears to be behind Japanese corporations’ response to an often-exaggerated threat. On July 30, 2007, Tokyo High Court ruled in favor of Bull-Dog Sauce Co. by defining U.S. investment fund Steel Partners as "an abusive acquirer" and as a result, opened the way for Nisshinbo Industries Inc. to further strengthen cross shareholdings with Nisshin Seifun Group Inc. to thwart a further move to buy into Nisshinbo Industries by Steel Partners which controlled a 5% stake in the company.
All these prompted Tokyo President Atsushi Saito to warn that Japan’s capital markets would not develop” unless its companies give shareowners adequate information about their activities and ensure that their rights are protected. In a February monthly press session, Mr. Saito, one of a handful of reform advocates in Japan, raised concerns about reverse share splits and new hybrid loans which come with dilutive warrants that can be exercised in the event of an unwanted offer. However, what have allowed such a setback are regulatory inadequacies. Let us take a look at the issues of poison pills and cross shareholdings in Japan (parenthetically, regulatory oversight remains weak in Japan. I am attaching an AFP piece to the bottom of this paper to illustrate the point.)
-. Poison Pill
There are no rules or regulations directly governing poison pills in Japan. Companies usually follow the Defensive Measures Guidelines, which were written by the government almost exclusively for poison pills through the issuance of stock purchase warrants. Since the guidelines are not legally binding, it can be expected that there will be companies which will adopt poison pills that are tailored to address the particular issues associated with management’s needs. The aforementioned reverse share splits and new hybrid loans which come with dilutive warrants clearly represent an attempt by some Japanese companies to skirt the guidelines. The guidelines itself are often inadequate. For instance, the guidelines require the pills to be subject to the annual review of an independent ad hoc committee. However, the guidelines do not require the companies to demonstrate the independence of the third party committee through public disclosure. The companies do not usually disclose sufficient information to allow outsiders to evaluate the independence of the ad hoc committees.
Some poison pill plans feature a proviso allowing the ad hoc committee to activate the pill if it sees the bid as a threat to corporate and shareholder value or if the bid does not meet some – often unspecified -- criteria for the qualifying bid. While most Japanese poison pills follow the guidelines and feature TIDE provisions, some of the plans also authorize the ad hoc committees to renew the poison pills. Since most of these companies adopted poison pills in 2006-07, we have to wait for the next three years to find out whether these pills will be renewed by the committees or by shareholders. There are no downright dead-hands in Japanese poison pills yet, but they feature what would be called an invisible hand.
-. Cross shareholdings
A new round of cross-shareholding alliances in Japan has been often carried as a headline item in financial news outlets in the past two years. In the 1950s-80s, Corporate Japan resorted to cross shareholdings to retain a cozy relationship between financial institutions and their corporate clients. The cozy relationship worked because Japan, albeit a global industrial hub, was basically a locally grounded economy. Companies could be protected from international influence by a group of interlocking shareholders. The system began to crumble, following the collapse of the bubble which forced banks to sell their equity positions in their corporate clients. In the process, foreign ownership of Japanese shares rose to 28% in 2007 from 4.7% in 1990. With the rise of new foreign players in the capital market, Japanese corporations began to form cross-shareholding alliances between themselves, instead of financial lenders, to forestall unwanted takeover bids.
A 2007 study by the Daiwa Institute of Research, a research arm of Daiwa Securities, indicated that 5.6% of Japan’s bourse was locked in cross-shareholdings in fiscal 2006, at least 2.11% of which is between what local media dub “friendly [or stable] investors.” According to the study, three big corporations, Toyota Motor Corp. , Matsushita Electric Industrial Co. and Nippon Steel Corp., led the increase in cross shareholdings between friendly companies.
In response to what they described as a hostile takeover threat from Arcelor Mittal, Japan’s three steelmakers, Kobe Steel, Ltd., Nippon Steel Corporation and Sumitomo Metal Industries have since Oct. 2007 strengthened their cross shareholdings alliance. By the end of fiscal 2006, their cross shareholdings have involved into a circular shareholding arrangement that could be only found in Korea’s chaebol. In 2007, Nippon and Sumitomo respectively spent JPY 100B to boost Nippon's stake in Sumitomo Metal to 9% from 5% and Sumitomo's stake in Nippon to 4% from 1.81%. Sumitomo also controlled 5.1% of Nippon and 1.71% of Kobe. In February 2008, Sumitomo Metal agreed to issue JPY 49.6B worth of its shares to Sumitomo Corporation and to purchase JPY 15B worth of Sumitomo Corporation shares to strengthen their cross-shareholding ties. In the same month, Nippon Steel Sumitomo Corporation said they would will spend about $63 million apiece to raise their stakes in coke producer Mitsui Mining Co.
The ever-complex tripartite steel alliance may have more significant governance implications because it is not just meant to ward off hostile takeover bids, but also to better position the companies in the raw-material and the end market because it includes product-sharing and joint purchase arrangements.
It is also setting the tone for cross holdings in Asia’s steel industry. In 2006, South Korea’s steelmaker POSCO entered into a cross shareholding alliance with Nippon Steel. The two companies are currently implementing 14 R&D projects involving a total of 5K engineers on both sides of the Sea of Japan. Emboldened by its alliance with the Japanese steelmaker, POSCO in April 2007 decided to sell about 872K common shares, or 1% of treasury stock, to Hyundai Mipo Dockyard, a unit of the Hyundai Heavy Industries Group, and to buy a 1.9% stake in Hyundai Heavy Industries, the conglomerate's flagship unit, from Hyundai Mipo Dockyard Co., Ltd. With the stock swap, POSCO is now enmeshed in the complex web of circular shareholdings of the Hyundai Heavy Industries Group. Japan’s JFE Holdings Inc. and Korea’s Dongkuk Steel Mill Company Limited took the lead taken by Nippon and POSCO last year and formed a cross shareholding alliance.
Since they are often more than an excessive defense, the cross shareholdings weigh down on the companies’ shares. Since February, shares of Sumitomo Corporation fell more than more than 30%, incurring 16 billion yen in latent losses. Sumitomo Metal fell by 12%, Kobe 6% and Nippon Steel 11%.
Japanese firm rapped over Sony, Toyota 'acquisition' claims: official
27 January 200822:42
Agence France Presse
Japanese authorities have ordered a little known firm to correct its claim that it had bought controlling stakes in a clutch of corporate giants including Sony and Toyota Motor, officials said Monday.
Teramento Corp., reportedly capitalised at 1,000 yen (9.3 dollars), raised eyebrows on Friday as it announced "acquisitions", together worth 188 billion dollars, of majority stakes in some of the nation's leading companies.
It claimed it had bought 51 percent of Sony Corp., Toyota Corp., Nippon Telegraph and Telephone Corp. (NTT), Mitsubishi Heavy Industries Ltd., Fuji Television Network Inc. and Astellas Pharma Inc.
The company, which is registered in Kawasaki City near Tokyo and involved in IT and other businesses, made the claim in filings with the Financial Services Agency's electronic information disclosure system after the market close Friday.
The filings prompted the agency to launch a probe as the total value of the deals would be some 20 trillion yen (188 billion dollars), nearly one quarter of Japan's national budget.
The agency "judged the claim about the (acquisition of the) 51 percent stakes is false and ordered the company to correct its reports," said an inspector at the regional financial bureau supervising Kawasaki.
Teramento was ordered to correct the filings by 5:15 pm (0815 GMT) on Monday when the electronic disclosure system halts for the day, the official said.
The company had not submitted a correction as of late morning, he said, adding that failure to obey the order was punishable by imprisonment of up to one year or fines of up to one million yen.
The mass-circulation Yomiuri Shimbun quoted Teramento's representative as saying: "I run an IT company but live on doing part-time jobs. I didn't know what I filed would be made public as they are."
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