SANTA MONICA, CALIFORNIA AND TOKYO, JAPAN – Dalton Investments issued the following letter publicly to the management and directors of its portfolio companies to continue to engage them in the following three corporate governance expectations: (1) effective capital allocation, (2) strong alignment of interest between the board of directors/management and shareholders, and (3) board of directors with high independence and diversity. This letter is a follow-up to one sent last December, when Dalton reached out to portfolio companies as part of their engagement campaign on improved corporate governance: https://www.daltoninvestments.com/dalton-issues-letter-to-management-and-directors-of-our-portfolio-companies/
The Japanese version of the letter follows the English version.
Dear Portfolio Company Managers, Directors, and IR Managers,
Last December, we sent a letter to all of our portfolio companies outlining three proposals: “Effective Capital Allocation,” “Strong Alignment of Interest,” and “Board with High Independence and Diversity”(https://www.daltoninvestments.com/dalton-issues-letter-to-management-and-directors-of-our-portfolio-companies/). The letter was followed up with multiple instances of engagement with management teams to exchange ideas and thoughts prior to the annual general shareholders’ meeting. In total, over ninety meetings were held with portfolio companies, led by members of the Dalton Tokyo Office. We thank you once again for the generous time you have provided for constructive dialogue.
Admittedly, some of these meetings were tense, as discussions included the possibility of a shareholder proposal in the AGM. However, almost all our counterparts understood and agreed with our intentions, and we are proud of the open and productive dialogue . With management teams that agreed with our proposal criteria, we had more detailed discussions where we shared best practices, providing strong examples that helped companies to respond with concrete actions, such as:
- Capital Allocation: Establishment of capital policy (e.g., 100% return ratio), setting KPIs and corresponding targets, including ROIC, share buybacks, and dividend increases
- Alignment of Interest: New stock ownership guidelines and disclosure, increased implementation of equity compensation plans
- Board Composition: Increased diversity and independence, the appointment of female directors and highly experienced and skilled investors and analysts
From these collaborative dialogues, many management teams adopted one or more of the measures outlined in our initial letter. As a result, we withdrew the majority of our original shareholder proposals prior to the AGMs. We are proud of this result.
We acknowledge that some of these initiatives would have occurred regardless of our proposals. We understand that all management level decisions are subject to a voluntary decision by the Board of Directors, rather than a simple shareholder proposal. We view shareholder proposals as a catalyst for the boards’ consideration and action. The resulting improvements in governance and capital allocation, and thus corporate value, are ultimately the result of actions taken by management.
As the shareholder meeting season ends, we hope you will promptly resume your efforts to further improve corporate governance and capital allocation under the new board structure. During our dialogue, we noticed that while we agreed on many issues and goals, there were some cases where structural or time constraints disallowed companies from addressing their problems at this year’s general shareholders’ meeting. We further recognize that there are a few issues that remain unresolved.
Below is a summary of our expectations for your consideration over the next year.
Effective Capital Allocation:
As part of the company’s capital policies, we expect our portfolio companies to quantitatively disclose and commit to an “Appropriate level of financial assets (or capital structure),” a “Specific capital allocation plan for the next three to five years,” “KPIs including ROIC and ROE and their target values,” and “Target for reduction of cross-shareholdings.” Many companies hesitated to quantify and disclose their capital allocation policies due to uncertainty surrounding the economic and business environment and future investment opportunities. However, uncertainty should not be a reason to abandon capital policy because all business decisions are made under a great deal of uncertainty. We believe it is the management’s responsibility as a publicly listed company to review its capital allocation policy, asking the important question of what the appropriate amount of cash might be given its business risks. If a major event occurs after the plan is formulated, it is perfectly acceptable for the plan to be revised accordingly.
In addition, as a prerequisite for the above capital allocation expectations, we believe that it is essential for the board of directors to have an opinion on the fair valuation of the company’s shares. The Tokyo Stock Exchange’s request to listed companies states that “the board of directors should analyze and evaluate the current situation with regard to market valuations,” and we believe that statement inherently implies that capital allocation should be judged against alternative opportunities, such as share buybacks.
Strong Alignment of Interest:
We expect our portfolio companies to disclose, implement and commit to a stronger alignment of interest through the Stock Ownership Guidelines. We encourage directors to accumulate ownership worth 3-5 times their fixed compensation over a reasonable time frame without being bound by Japanese practice. Some companies have voiced concerns that the level of stock ownership we expect is too high compared to existing compensation plans, causing conflicts with employees. However, by combining several programs, such as restricted stock compensation, stock options, stock ownership plans, and stock delivery trusts, we have seen an increase in ownership among executives and employees at some companies to a level comparable to Western companies. When that has occurred, we have seen a real change in the mindset of executives and employees. We are always eager to help with these initiatives.
Board with High Independence and Diversity:
We expect at least half of the board of directors to consist of independent outside directors while increasing diversity (including women, experienced investors and equity analysts). In response to our proposal, we have received comments that “we do not want to sacrifice the Board’s effectiveness for formality” and “our Board of Directors is already highly effective.” However, we know of many examples of highly effective boards with a majority of independent outside directors – effectiveness and independence (including diversity) are not trade-offs. While there may be some friction in the process of increasing independence, we believe that for public companies in developed countries, these are issues that must be overcome, and we firmly believe that a truly resilient board of directors is both independent and effective. We understand that finding and considering appropriate candidates is difficult, and we ask that you make sustained efforts towards that long-term goal.
Reflecting on the progress we have observed from our portfolio companies over the past six months, we are confident that our proposals are no longer unreasonable challenges. It is possible for all of our portfolio companies to meet our proposals by this time next year. We will continue to play our role as a shareholder by supporting your efforts. We trust that our dialogue with you over the next year will be fruitful and that we may not even need to make public shareholder proposals for the 2024 AGM season.
Sincerely yours,
James B. Rosenwald III
Co-Founder and Chief Investment Officer
Dalton Investments
Please note that the below is a Japanese translation of the above letter that Dalton Investments sent in English, provided as a courtesy. In the event of any inconsistency between the English language version and the Japanese language version, the meaning of the English language version shall prevail.
親愛なる投資先の経営者様、取締役の皆様、IRご担当者様
平素よりお世話になっております。昨年12月に私共は全ての投資先の皆様に「適切な資本配分」「利益共有の強化」「取締役会の独立性と多様性」という3つのご提案についてのレターをお送りいたしました（https://www.daltoninvestments.com/dalton-issues-letter-to-management-and-directors-of-our-portfolio-companies/ ）。 以降、本年の株主総会シーズンに至るまでの約半年間にわたり、多くの皆様と度重なる対話の機会を頂きました。東京オフィスのメンバーを中心に、投資先の皆様より頂いた対話の回数はのべ90回を超えました。皆様から惜しみない対話のお時間を頂きましたこと、改めて御礼申し上げます。
株主総会における議案提案の可能性を示唆する内容であったため、時には緊迫感を伴う場面も有りましたが、提案内容の主旨についてはほぼすべての皆様からご理解・賛同頂き、生産的な対話をさせて頂いたと自負しております。また、昨年末時点で私共のご提案内容をすでにクリアされている会社様とはより発展的な対話もさせて頂き、私共が学ばせて頂くことも多々ありました。結果、多くの会社様から下記の事例を含む具体的なアクションを伴うご回答を頂くことができました。
- 資本配分＝資本政策方針の策定（例：100％還元性向）、ROICを含むKPI及びその目標値設定、自社株買い・増配の実施
- 利益共有＝株式保有ガイドラインの新規導入と開示、株式報酬制度の実施額増加
- 取締役会＝多様性・独立性の向上、女性や投資家・アナリストとして高い経験とスキルを持つ人材の登用
結論を申し上げれば、私共との対話の期間において、ご提案差し上げた先の半数以上の皆様から上記のいずれか、または複数の施策を実施頂きました。結果として、私共が当初お送りした株主提案の過半数は、日の目を見ることなく撤回させて頂く事ができました。この結果に誇りを持っております。
無論、上記には私共の提案の有無にかかわらず皆様が実施されていたであろう施策も含まれます。最終的なアクションは株主提案の承認ではなく、全て取締役会の自主的な機関決定によるものです。もとより私共は株主提案を、あくまで取締役会におけるご検討とアクションを促す触媒と考えております。結果として生まれたコーポレートアクションを通じたガバナンス・資本配分の改善（ひいては企業価値向上）は、経営者の皆様のご尽力の賜物です。
株主総会シーズンが終わり、新体制の下、皆様が更なるガバナンス・資本配分の改善に向けた取り組みを速やかに再開される事を期待しております。今回対話の中で、皆様と私共で経営課題・ゴールの認識は一致しながら、実務的観点から本年の株主総会までには実現ができない合理的な事情があった事例も多く（その様な場合を認めた場合も株主提案を撤回しております）、積み残しの課題も少なからずあるものと認識しております。
以下に、皆様の更なるご検討に資することを期待し、改めて私共が期待する1年後の皆様の姿をお伝えします。
適切な資本配分：
私共は投資先の皆様が資本政策として「適切な財務資産の水準（または資本構成）」、「向こう3～5年間の具体的な資本配分計画」、「ROIC、ROEを含むKPIとその目標値（KGI）」「政策保有株の縮減目標」を定量的に開示・コミットいただく事を期待します。経済・事業環境や将来の投資機会の不確実性を理由に、資本配分政策の定量化・開示に躊躇される会社は少なくありません。しかし私共は不確実性を理由に資本政策を放棄してはならないと考えます。あらゆる経営の意志決定は多くの不確実性の下で行われるか、あるいは一生できないかのいずれかです。資本政策を見直す上で、事業リスクを踏まえ、適正キャッシュはいくらかと常に自問自答することが、上場を維持するマネジメントの宿命だと考えます。勿論、計画策定後に重大な事象が発生すれば、計画を適宜修正頂く事は全く問題ございません。
なお、上記資本配分を行う前提として、自社株式の正当な評価額について取締役会としての見解を持つことも必須と考えます。今春の東京証券取引所から上場企業への要請にも、「市場評価に関して取締役会で現状を分析・評価」と言及されていますが、加えて私共は、皆様の投資の意思決定が常に自社株買いという代替機会との比較の上、企業価値向上の観点から判断される事を期待します。
取締役会・経営陣と株主の利益共有強化：
私共は株式保有ガイドラインを通じて、具体的な利益共有改善の道筋を投資先の皆様がご自身で制定・開示（コミット）することを期待します。ご存じの通り、私共は日本的な慣習にとらわれることなく、取締役の皆様が固定報酬の3－5倍の株式を保有する状況を合理的な時間軸で築くことをお勧めしています。私共が期待する株式保有の水準は、会社様から既存の報酬制度に照らしてハードルが高すぎる、あるいは従業員との軋轢を懸念する声を頂くのも事実です。しかし、譲渡制限株式報酬・ストックオプション・持ち株会・株式交付信託等、複数のプログラムを組み合わせることで役職員のオーナーシップを欧米企業に引けを取らない水準まで高め、結果役職員の意識変化の実感をお持ち頂いている事例もございます。私共も常にお力になりたいと考えておりますので、ご関心あればお問い合わせください。
多様性と独立性の高い取締役会：
私共は引きつづき、少なくとも取締役会の半数以上を独立社外取締役で構成して頂く事、同時に多様性（女性や投資家・アナリストの経験者を含む）を高めていただく事を期待しております。今回私共の提案に対して「形式のために実効性を犠牲にしたくない」「当社の取締役会の実効性は既に高い」というご意見を頂きました。しかし、私共は独立社外取締役が過半を占めながらも極めて実効性の高い取締役会の事例をいくつも存じ上げており、実効性と独立性（多様性）は克服不可能なトレードオフではないと信じております。確かに形式面での水準を高めていく過程では一定の摩擦も起こり得ます。しかし、先進国の上場企業にとって、これらは遅かれ早かれ乗り越えるべき課題であり、形式と実効性両方を備えてこそ真にレジリエンスのある取締役会と考えます。適切な候補者探し・検討が容易でない事も理解しておりますので、なおさら長期的な目標の下、持続的な取り組みをお願いいたします。
以上のご提案は、過去半年間の進捗をふまえれば、もはや無理難題ではなく、1年後には全ての投資先の皆様がこの水準をクリアすることは十分可能と確信しております。私共は引き続き、皆様の取り組みを後押しする形で株主としての役割を果たしていきたいと考えています。今後1年間の皆様との対話がより実りあるものとなり、2024年の私共の株主提案がゼロになることを我々自身が誰より願っております。
James B. Rosenwald III
Co-Founder and Co-Managing Member
Dalton Investments LLC
IMPORTANT INFORMATION
This letter has been prepared by Dalton Investments and its affiliates (collectively, “Dalton”) for the benefit and use of the original recipients. It does not constitute, and should not be construed as, an offer or solicitation to enter into any transaction regarding any financial instrument, nor should it form the basis of or be relied on in connection with any such transaction. This letter does not constitute, and should not be construed as, tax, legal, regulatory, accountancy or other specialist or technical advice, or investment advice or personal recommendations, any trading strategy or advice (from an investment perspective) to any person on the suitability of any transaction.
The information in this letter is based on information that Dalton considers reliable, but which Dalton did not verify any of the information. No representation or warranty is made as to, nor should reliance be placed on, any of that information contained herein being accurate or complete. Neither Dalton nor any of Dalton’s directors, officers or employees accepts any responsibility or liability for any losses or damages that may result from the lack of accuracy or incompleteness of this information. Such persons also do not accept any responsibility or liability for assumptions on which any statements, views, valuations or opinions expressed by Dalton in this letter may be based.
This letter speaks of its date and opinions and views expressed are Dalton’s opinions and views as of such date only. Dalton assumes no obligation to notify or inform any party of any developments or changes occurring after the date of this document that might render its contents untrue or inaccurate in whole or in part.
Any possible transaction or investment referred to herein may involve significant risk. This document has been prepared without regard to the individual circumstances and objectives of persons other than the original recipients who receive it. Other recipients should, without relying on this document, make their own independent decisions regarding to any possible transaction or investment and, if necessary, seek professional advice.
Dalton accepts no liability whatsoever for any reproduction or redistribution, in whole or in part, of this document, by any person other than Dalton.
The distribution of this document in certain jurisdictions may be restricted by law, and recipients into whose possession this comes should inform themselves about, and observe, any such restrictions.
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