B d C t GBeyond Corporate Governance -What is Expected of a Company in

the Post Crisis Era? -the Post Crisis Era?

Nami MatsukoHead of Corporate Citizenship DepartmentNomura Holdings, Inc.May 27, 2010

© Nomura Holdings, Inc.

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TOPICS

l. Current Discussion and Rule Changes on Corporate Governance

ll. Where Have We Come so far?

Did rule changes and shareholder activism drastically change theDid rule changes and shareholder activism drastically change the landscape of corporate governance in Japan?

(Case 1) Takeover Defenses( )

(Case 2) Independence on the Board

lll. What is expected in Post-Financial Crisis Era?

3

I. Current Discussion and Rule Changeson Corporate Governance

4

Discussion at government level has startedDiscussion at government level has startedAfter a decade of informal discussion, governments have started to seek ways to enhance corporate governance in formal settings.Why Now during Financial Crisis?

20102009 2008

June June JuneDec March

Why Now, during Financial Crisis?

General General shareholders’ shareholders’

meetingmeeting

General General shareholders’ shareholders’

meetingmeetingcompanies

June

General General shareholders’ shareholders’

meetingmeeting

TSEReport

Released (23/4/2009)

Rules for Board*

and Disclosure (30/12/2009)

Public Comments (19/5/2009)

Rules for Placing *

(24/8/2009)

(*Introduction of independence (*Introduction of independence needs to be completed in 2011)needs to be completed in 2011)

FSA Report Released * (17/6/2009)

Rules for Disclosure

(Governance, Cross-Shareholdings, Compensation etc)

Report Released ?UK Takeover

Rule

METI Report Released * (17/6/2009)

Report Released (30/6/2009)

?Rule

Study Group

MOJ/DPJ

2011-12?

MOJ-led discussion

for company law

DPJ – draft of new company law for

“listed companies”

5* Please refer to next pages for topics covered

law

Comprehensive Topics are coveredComprehensive Topics are coveredFrom Equity Financing to structure of the boards - what really motivated the changes?Will DPJ make a shift towards stakeholder/shareholder friendly rules and how?

TSE (Listing Rules) FSA (FEIL) METI DPJ (MOJ)

Main body of discussion

Comprehensive Improvement Program

for Listing System

Financial System Council's Study Group for Strengthening the Competitiveness of

Japan's Financial and Capital Markets

Corporate Governance Study Group

Advisory Committee

(Feb. 2010 -- )

Third Party Share Issuance (Placing)

Issues regarding Equity Finance / Capital Raising

Third Party Share Issuance (Placing) Issuance of MSCB (Moving Strike Convertible Bonds)

Corporate governance

Independence on the boardEmployee Representatives on Statutory Auditors BoardG l t d l

Themes

Cash-Out via Reverse Stock

Proxy voting related matters, disclosure of voting results

Convertible Bonds)Squeeze out of minority shareholdersSubsidiary ListingGovernance of Group CompaniesCorporate Governance (Structure of the boards Independence Statutory

structure

Independence of the Board (outside directors and statutory auditors)

Group related rules –protection of minority shareholders at parent company on actions at subsidiary level and vice

voting results

Management Buy Out

(Takeover Defenses / Rights Plans)

boards, Independence, Statutory Auditors)Executive Compensation disclosureProxy Voting, dialog between investors and companiesCross-shareholdings

statutory auditors)

Number of outside directors

versaNo subsidiary listing??Pre-emptive Right (Rights Issue?)

Cross-shareholdings(Defense Measures / Rights Plans) (M&A / TOB rules??)

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II. Where Have We Come so far?Did rule changes and shareholder activism drastically change the landscape of corporate governance in Japan?

(Case 1)Takeover Defense Measures(Case 1)Takeover Defense Measures

(Case 2) Independence on the Board(Case 2) Independence on the Board

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Investors vs “Corporate Japan”Investors vs. “Corporate Japan”

Increase in Foreign Ownership

and

～Mid 1990’s

C i ti ith i tit ti l i t

Response to “Sokaiya” shareholders (Corporate Mafia)

and

Decrease in Cross shareholdingsMid 1990’s ～Communication with institutional investors

IR activities

Early 2000’s

Confrontation with activists and institutional investors has been

Confrontation with activists has begunHostile takeover attempts and proxy fights

Decrease in Foreign Ownership

and

2005 ～2007

Confrontation with activists and institutional investors has beenintensified

Hostile takeover attempts and creeping share acquisitionsProxy voting, shareholder proposals, direct communicationAdoption and Use of Rights Plans (Defense measures)

Slight Increase in Cross shareholdings

Has Confrontation been eased and Constructive dialog begun?Changes in the attitudes of both Corporation and Investors were

observed

Adoption and Use of Rights Plans (Defense measures)

FINANCIAL CRISISFINANCIAL CRISIS～2008

2009 ～Corporate Governance Rule Changes

Are rules (substantial and disclosure) comprehensive enough?Do rules serve the purpose? What were to be changed?

Investors coming back to Japanese Market??

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Dilution caused by Equity financing / large scale public offering New types of Investors?

NEXT step for Japanese companies is to gain investor confidence

(Case 1) Takeover Defenses(Case 1) Takeover DefensesMore companies drop takeover defense measures and fewer companies adopt them this year.Japanese type of takeover defense measures was NOT as shareholder-unfriendly as perceived in its structure.

Wh t ?What was wrong?How can Japanese companies (re)gain investor confidence?Is it the fault on the side of Japanese companies?

600

᧤QXPEHU�RI�FRPSDQLHV᧥

N l d t d 206

About 5% of all listed companies

About 10% of all listed companies

About 15% of all listed companies

Newly adopted: 22 companies

450

500

550

600

$GYDQFH�:DUQLQJ�7\SH

7UXVW�7\SH�5LJKWV�3ODQ

Newly adopted: 224 companies

Newly adopted: 206 companiesShift from Trust Type Rights Plan: 1 companyCancellation: 9 companies

y p pShift from Trust Type Rights Plan: 5 companiesCancellation: 22 companies

560 563300

350

400

pShift from Trust Type Rights Plan: 1 companyCancellation: 3 companiesNewly adopted: 131

companies

companies

eAccessShiseidoWORKS

APPLICATIONS

362

150

200

250 Shift from Trust Type Rights Plan: 2 companiesCancellation: 3 companies

APPLICATIONS MORITEX

ROHM Riken Vitamin EZAKI GLICO

6 10 9 8 3

140

100

50

100

Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009

EZAKI GLICOAderans Holdings…

June June June June June

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(Case 2) Independence on the Board(Case 2) Independence on the Board

Expected roles of independent directors perceived by corporations and investors (and among investors) are not the same.I d d f th t/ ti i d t t t i it h h ld b l i fli t i ?Independence from the management/executives in order to protect minority shareholders by solving conflict issues?

e.g. Stance towards hostile takeover, Activation of poison pills, MBO/Privatization, Listed subsidiaryAdvice to the management on compliance and financial (cost of capital, dividend / repurchase policy) to minimize downside risk?Advice to the management based on industry and technology to increase value of the company and to maximizeAdvice to the management based on industry and technology to increase value of the company and to maximize upward return and shareholder value?

Independence either on Board of Directors or Statutory Auditors is required >>> should the same role be expected?

Minimum standards for governance would help to recover investor confidence.

Supporting Opinion

Corporate governance should be left to the decision of each company.

Dissenting Opinion

Change in governance may deter problems/scandals to occur.

Independent directors may be well positioned to understand and monitor the long term policies of companies such as R&D which is necessary for sustainable long term growth

p y

Chance in governance structure does not enhance corporate performance and could not prevent financial crisis in US.

Directors in Japan, inside or outside, are not working solely for minority shareholders but for all stakeholders and outsideR&D which is necessary for sustainable long term growth.

Independent directors should act for the interest of minority shareholders who are not represented by anyone otherwise.

minority shareholders but for all stakeholders, and outside directors are not be motivated to work for them.

Statutory Auditors provide monitoring function through their participation in the board meeting in their capacity to “audit” the

Statutory Auditor system serves its purpose, but their authority is limited (no voting right at board meetings, etc)

The role of outside directors is not to give opinions and advice based on industry specific expertise.

legality of the board action, including the discharge of fiduciary duties.

Outside directors without industry specific expertise can not give sound business advice to the board as expected.

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y p pWhy should governance issues be prioritized in the face of financial crisis?

(Case 2) Independence on the Board(Case 2) Independence on the Board

How can we make it work?

IndependentCommittee

Plans adopted / activated by Outcome

Cases in which the activation of Rights Plans was deliberated at “Independent Committees”

Committee activated by

Hokuetsu vs. Oji Paper(2006)

Yes (3, non-business related)

No outside directorsBoard Independent committee recommended to activate the plan.

Board decided not to issue rights but undertook "private placement"No outside directors

Bulldog vs. SP(2007) N.A.

Shareholders (after tender offer was Shareholders approved the activation and the dilution was caused.

SP i d h i ti(2007) (launched) SP received cash as economic compensation.

Yes

After Q&A period (8 months) and board examination period (2 months), Independent committee and Board concluded that SP would cause damage to shareholder value (2008)Sapporo vs. SP

(2007ᨺ2009)(3 from business and

academic)Outside directors present

Board ⇒ Shareholderscause damage to shareholder value (2008). SP withdraw takeover proposal, and Renewed rights plan was approved by shareholders(2009).※ Renewed rights plan approved by shareholders in 2009 has a

provision to limit the time for Q&A and board examination period.

Toyo Denki vs. Nidec(2008)

Yes (3 from lawyer, academic and outside

statutory auditor)No outside directors

Board On the closing of Q&A period (3 months) and before the start of board examination period, Nidec dropped its proposal.

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III. What is Expected in Post-Financial Crisis Era?

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Corporate governance through capital market mechanisms , or shareholder governance, has been recognized as a "means" to ultimately enhance shareholder valuea means to ultimately enhance shareholder value.

In recent years, new rules and regulations for market-driven corporate governance have been introduced in Japan and other Asian countries, albeit with different timetables and content mainly in order to attract foreign investors to the domestic market.

Unfortunately, at least in Japan, compliance with these rules is sometimes seen as more of an "end" than a "means".

In this post-financial crisis era, re-thinking and re-designing corporate governance in a broader context includingan ESG and CSR viewpoint may be a good start for all stakeholders - including shareholders - whose ultimate common goal is enhanced corporate valuecommon goal is enhanced corporate value.

Shareholder-led corporate governance increases its important more than ever in post-financial crisis era since shareholders are best positioned, next to the companies themselves, to urge companies to focus on efficiency and growth, which is the key to the sustainable growth of Japanese companies in post financial crisis era.crisis era.Caveat is not to let companies to use “stakeholder’s interest” as an excuse to disregard shareholders!

Re-definition or Fiduciary Duties on the side of investors and sponsors is also crucial to advance corporate governance which should be the basis for sustainable growth of companies.