Anti-takeover Measures and Corporate Management
Annual General Shareholders’ Meeting (AGM) for March fiscal year-ending companies, which still majority of Japanese companies fall into, are held in June and I believe it is the busiest time of the year for those who are in corporate headquarters in charge of the AGM.
Looking at the agenda for this year’s meetings, you may have noticed that there is a trend to respond favorably to shareholders and investors, as seen in the fact that of the many companies that had put anti-takeover measures in place, nearly thirty have decided to abolish them, or move towards doing so. But on the other hand, strikingly, there seem to be 5+ companies that are still trying to put new anti-takeover measure in place. From the outside we can only guess at what the individual situations are, and I’m sure management must have its own good reasons, but there is nevertheless an anachronistic feeling.
Implementation of anti-takeover measure might in a way, give somewhat positive impression to shareholders (I know I am stretching a bit too far on this)due to lowering of risk that may arise from discontinuity of current managementteam. Increased predictability of the corporate strategy is good as long as the strategy seem to maximize shareholder value. However the counter argument is that with the implementation of anti-takeover measures, it casts serious threat to market mechanism as preventing the free trade of securities would increase the risk of management starting to pursue their own interest rather than shareholder value, widely known as agency problems. As we all know, devils whisper to us every day. Even in Japan, after a few years of tug-of-war it has become a consensus that overall, anti-takeover measure has a negative impact on long term shareholder value, evidenced by most of the publicly announced voting guidelinesby many pension funds and money managers clearly stating to vote against the measure (and still five+ companies introduce the measure).
Now here is the difficult question. Judging whether the management is undoubtedly putting the best effort to increase the long term shareholder value or not should of course not be judged just by recent quantitative figures of the company. But because intrinsic shareholder value cannot be measured by simple procedures, management must interact with shareholders and investors and explain with sincerity and investors need to listen to what they are saying in order to make prudent investment decisions for their clients. If, for example, implementation of anti-takeover measures may limit the chance of constructive interaction between management and investors, this could result in lesser reliable information, and thus increased risk for shareholders and investors. In the end, it is likely to result in perpetual undervaluation of the company. In my personal, perhaps somewhat extreme opinion, if managers are considering setting up takeover defenses for their company, I feel they should also consider more radical solutions such as a management buyout or other forms of going private assuming the aim to introduce such measure is to limit the noise that may arise from having many differentnoisy shareholders. By becoming a full subsidiary of a parent company, or going under the umbrella of a certain company or patron, or just buying it for yourself (yes this is the MBO),the management will free themselves up from being obligated to explain details to many different parties and can focus on a selected shareholders to fulfill their accountability obligation. This should clearly enable the management and employees to focus on their real jobs and goals, resulting, hopefully, in better shareholder value and growth prospects.
In any case, it is extremely encouraging that the overall trend we see is anti-takeover measures being torn down, many more companies setting up non-statutory committees, more outside directors being nominated, and more managers coming directly to terms with the significance of being a public company and striving to increase corporate value. It is wonderful that at the same time equity-based compensation is becoming more common, and it is taken for granted that directors should be rewarded based not just on their responsibilities but on the outcome of their efforts. It is my fervent hope that this trend grows in strength and breadth, and I myself will exert my utmost efforts to promote it.