CHICAGO--(BUSINESS WIRE)--RMB Capital (“RMB”), an independent, Chicago-based investment management firm with approximately $9.1 billion in assets under management (estimated as of March 31, 2018), filed its ownership of more than 11% in Faith Inc. (4295 JP) in August 2017 and filed its shareholder proposal to send Masakazu Hosomizu, RMB partner and portfolio manager, as an outside director to the board of Faith on April 25, 2018. RMB believes its proposal would protect minority shareholders’ interest and enhance corporate governance at Faith and eventually improve the corporate value of Faith.
1. Need to monitor the Faith management’s capital policy from the shareholders’ viewpoint
RMB is concerned about Faith management’s capital policy, which has been inconsistent. About a year ago, Faith’s management conducted a stock-swap deal to fully acquire Nippon Columbia, which caused a significant dilution of shareholder value. Management has not made any strategic investments with the spared cash. Instead, they recently decided to return capital through a 5% share buyback program. Further, management’s description of their strategic investment policy has been shifting as well. Last year, they claimed to initiate consolidations in Japan’s fragmented music industry, where Nippon Columbia is a central player. However, in their May 2018 analyst meeting presentation, this statement is replaced with investments in what they call “destructive” innovation, including block chain technologies. It could be “destructive” for minority shareholders if management hastily invests the cash in wrong places and overpays beyond the capital cost.
Validating the above concern, the losses at Faith’s content segment have been widening in recent years under the name of new business developments, and management expects as much as 66% decline in the consolidated recurring profit this fiscal year. RMB is skeptical about whether Faith’s management has a disciplined investment policy, has evaluated the results of their investments in business development, and is prepared to share those results with shareholders.
Under these circumstances, RMB believes sending its proposed candidate as an outside director to monitor management’s decision-making process would be in the best interests of Faith’s minority shareholders.
2. Need to build a strong corporate governance system
RMB’s concern about Faith’s corporate governance system only increased through negotiation related to its proposal. More specifically, RMB found the board’s decision-making process is not transparent and reflects a flawed corporate governance system. Because Faith does not have a nomination committee, the board had to take initiatives to consider RMB’s proposal. RMB requested an interview between its candidate and Faith’s board of directors—namely, outside directors—that would enable Faith to evaluate RMB’s proposed candidate. However, this request was refused, preventing the ability to gain information for minority shareholders.
In a May 22 press release, Faith announced its nomination of three candidates for new outside directors. However, RMB is skeptical about the independence of these candidates, who include an auditor of Nippon Columbia (a 100% subsidiary of Faith) and an outside director of Yoshimoto Kogyo (a shareholder and business partner of Faith), as well as a corporate advisor to Pasona Group, which was founded by an ex-board member of Nippon Columbia and had Faith’s founder as a board member.
As such, RMB believes Faith is failing to uphold a core tenet of the corporate governance system with its selection of outside directors. RMB’s proposed candidate would represent the minority shareholders’ interest as an outside director.
RMB believes Faith’s May 22 press release (“Board’s opinion regarding a shareholder proposal”) is totally baseless and unacceptable.
1. The founder CEO is “the specific shareholder” to worry about.
Faith’s management indicated it is skeptical about whether RMB’s candidate would consider the interests of all minority shareholders and not just those of a specific shareholder.
RMB believes “the specific shareholder” management should worry about is Hajime Hirasawa, the founder CEO and the largest shareholder of Faith with a 34% ownership. A strong corporate governance system has to be installed to control the interest of such a “specific shareholder.” At Faith, however, there are no nomination and compensation committees that oversee management, and its outside directors are not functioning as intended by the Corporate Governance Code. RMB’s proposed candidate is truly independent from the founder CEO.
2. We should respect diverse opinions.
Faith’s management asserts that RMB’s proposed candidate “does not understand the firm’s business policy” only because he has different opinions. However, RMB believes diverse opinions are valuable in constructive discussions to improve the corporate value of Faith.
3. Outside directors are not required to present “realistic, concrete business plans.”
Faith’s management misunderstands the role of outside directors.
Corporate Governance Code by Tokyo Stock Exchange defines the roles of outside directors in its Principle 4-7 as: i) Provision of advice on business policies and business improvement based on their knowledge and experience with the aim to promote sustainable corporate growth and increase corporate value over the mid- to long-term; ii) Monitoring of the management through important decision-making at the board including the appointment and dismissal of the senior management; iii) Monitoring of conflicts of interest between the company and the management or controlling shareholders; and iv) Appropriately representing the views of minority shareholders and other stakeholders in the boardroom from a standpoint independent of the management and controlling shareholders.
Faith’s statement that RMB’s proposed outside director should present “realistic, concrete business plans” is problematic. As clearly stated in the Corporate Governance Code, the role of outside directors is to monitor management. It is management’s responsibility to present “realistic, concrete business plans.” Furthermore, the three outside director candidates proposed by Faith’s management have not presented any “realistic, concrete business plans”—nor should they be required to.
4. Outside directors are not likely to put management “in chaos.”
The role of outside directors is to monitor management through a functioning corporate governance system while representing the views of minority shareholders and other stakeholders. RMB’s proposed candidate meets the qualifications to fill the position and has a clear understanding from past discussions with the management. Further, because the board decision is made by a majority voting, management will not “be in chaos” as long as it presents plans that are reasonable from the viewpoint of minority shareholders and other stakeholders.
About RMB Capital
Headquartered in Chicago, RMB Capital is an independent investment and advisory firm that serves high-net-worth individuals and families as well as institutional investors. Its businesses include wealth management, family office services, asset management, and retirement plan consulting. Its asset management business specializes in long-term, concentrated, active investing strategies with coverage that spans the market-cap spectrum and the globe. To learn more about RMB, visit www.rmbcap.com.