Negative effect due to parent-subsidiary listings | 蝶理の株主価値向上に向けて
What we hope Chori to increase the shareholders' value as a shareholder are
1.Drastic increase in dividend / share buyback to prevent further lowering of ROE
2.Dissolution of cross-shareholdings
3.Transform to a board led by independent outside directors

Negative effect due to parent-subsidiary listings

One of the reasons why Chori doesn’t change its management direction toward improvement of capital efficiency and shareholders’ value is that Chori has a problems with its corporate governance.

Chori is a subsidiary of Toray Industries, Inc. (hereinafter referred to as “Toray”). As of the end of September 2018, Toray holds 51.2% of voting rights of Chori. Toray and Chori both are listed (parent-subsidiary listings).

On 7th March 2019, Prime Minister Shinzo Abe held the meeting of the Council on Investments for the Future at the Prime Minister’s Office. The government of Japan showed concerns toward the parent-subsidiary listings as shown in the meeting’s materials that states it is difficult to ensure effective corporate governance on parent-subsidiary listings and that may harm minority shareholders of subsidiary. There were investors’ opinions in the same materials as follows:–

– Notwithstanding the outside directors who should be representatives of minority
 shareholders consist the member of the board, it is strange that the board members do
 not know investors’ opinions nor share information thereof.
– I was rejected when I requested a dialogue with a parent company as a shareholder of
 its subsidiary. The parent company argues that the subsidiary is an independent
 company. As a result, the board of listing subsidiary is given a free hand and no
 measures are taken against poor share prices.

Prime Minister Abe made the following statement in response to the circumstances above.

“We will therefore swiftly formulate new guidelines and request accountability of parent companies, while encouraging subsidiary companies to increase the proportion of external directors, who are independent from the controlling shareholder.
We will also consider relevant measures including the criteria used by the Tokyo Stock Exchange. These improvements of corporate governance regarding parent-subsidiary listings will be incorporated into the action plan for the growth strategy which will be compile this summer.”

Open in Another Window (the Prime Minister’s Office’s HP)

We think the backgrounds of the government policy above are as followings;

On 22nd June 2018, Corporate Governance System Study Group, led by the Ministry of Economy, Trade and Industry(hereinafter referred to as “METI”), announced a document specifying as follows:–

– In the discussion of Legislative Council of the Ministry of Justice, the majority
 approved that directors of a parent company have an obligation to administrate its
 subsidiary companies’ shares as assets.
– There is a consensus that it is a duty of directors of a parent company to supervise
 its subsidiaries.

This surely applies to Toray and Chori. Directors of Toray have responsibility to supervise Chori and increase the value of Chori’s share that is an asset of Toray.

Open in Another Window (METI’s document)

This obligation of parent company’s directors overlaps with that of stewardship for institutional investors who invest in the subsidiaries.
Therefore, the parent company’s directors can fulfil their obligations for the supervision of its subsidiary’s governance via positive dialogues with institutional investors above.

According to the thought above, we proposed, via Chori, a meeting for exchange of opinion to a director of Toray who is in charge of Chori. But our proposal was rejected.

Clearly, it is a negative effect of parent-subsidiary listings that Japanese government showed concern. An opinion of subsidiary’s shareholders is neglected because a parent company like Toray lacks awareness of responsibility for the supervision of its subsidiary’s governance.

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