Annual Stewardship Activity Report, 2014
1. Introduction 2. Interviews with s 3. Corporate Engagement 4. Exercise of Voting Rights for Japan Equity 5. Future Initiatives 2
1. Introduction More than 10 years of activity Pension Fund Association for Local Government Officials (the Association ) established in January 2004 the Corporate Governance Principles of Pension Fund Association for Local Government Officials and the Guidelines for Exercising Shareholders Voting Rights. Since then, the Association has regularly conducted interviews with institutions to which it entrusts investment management of Japan equity regarding their exercise of voting rights and dialogs with investee companies. Sign up to Japan s Stewardship Code The Association, as an institutional investor of an asset owner, signed up to Japan s Stewardship Code on May 30, 2014. The Association has reframed its existing activity with the Japan s Stewardship Code, deciding to further enhance its efforts. In accordance with this sign-up, the Association has partially revised its Guidelines for Exercising Shareholders Voting Rights. 3
1. Introduction 2. Interviews with s 3. Corporate Engagement 4. Exercise of Voting Rights for Japan Equity 5. Future Initiatives 4
2. Interviews with s Enhanced interviews with the investment managers The Association invests in shares of individual companies through investment managers. It conducts interviews with them on a regular basis with respect to their exercise of voting rights in line with the intent of the Association s Guidelines for Exercising Shareholders Voting Rights, as well as their corporate governance activities, such as having dialogs with the investee companies. With the sign-up, in this fiscal year, the Association has especially enhanced its understanding of the dialog with investee companies. Going forward, the Association will seek value enhancement of investee companies over the long term, clarifying each investment manager s approaches about purposeful dialog ( engagement ). Interviews with the investment managers in 2014 Last September, we have conducted interviews with 12 investment managers on their engagement and the exercise of voting rights for Japan equity. The overview of the results is described on the following pages. 5
1. Introduction 2. Interviews with s 3. Corporate Engagement 4. Exercise of Voting Rights for Japan Equity 5. Future Initiatives 6
3. Corporate Engagement Interviews on corporate engagement We have asked the following points with investment managers since this is the first year of the sign-up to Japan s Stewardship Code. i. The sign-up to Japan s Stewardship Code. ii. Engagement activity in the past. iii. Enhancement made with the sign-up to Japan s Stewardship Code. iv. Engagement examples. It is learned that all twelve investment management companies signed up for (i) and have already been working on corporate engagement for (ii). Regarding with (iii), some efforts are learned such as to look back regularly on expressly recoded engagement details, or to improve dialog skills by sharing engagement methods among relevant persons. For (iv), part of it is described on the following pages. 7
3. Corporate Engagement Examples active funds We have learned the approach of focusing engagement activity on the following types of companies through analysts monitoring. Companies that do not present their targets for capital efficiency and return to shareholders in midterm management plans or other similar documents. Companies that have management risks due to aging leadership and other reasons. Companies whose share prices are constantly discounted. Case Company Dialog A B C 1 st sec. of the Tokyo Stock Exch. (Foods) 1 st sec. of the Tokyo Stock Exch. (Transport. Equipment) JASDAQ (Service) Dialog on measures to improve corporate value and business strategy As a result of our continuous dialog with the CEO, target ROE and total return ratio are included in a midterm management plan published. We will continue dialogs concerning businesses that show poor investment efficiency. Dialog on management structure and business strategy We have continuously exchanged opinions with the company upon identifying multiple issues: concentration of authority an on older leadership member and poor product sales in emerging countries. Transfer of authority to their successors has progressed, and we have made recommendations on the use of private brands and sales strategies in business development in emerging countries while monitoring the progress. Dialog on market liquidity As a result of recommending that the company, whose share price remained at low levels versus favorable fundamentals, improve liquidity and expand investors, the company has announced a stock split and a dividend increase. 8
3. Corporate Engagement Examples passive funds We have learned the approach of covering the following companies: Companies that are ranked high on market capitalization. Companies that are ranked low on ROE. Companies that are engaged in antisocial acts. Companies with issues in their attitude toward return to shareholders. Case Company Dialog D E F 1 st sec. of the Tokyo Stock Exch. (Retail Trade) 1 st sec. of the Tokyo Stock Exch. (Metal Products) 1 st sec. of the Tokyo Stock Exch. (Iron&Steel) Dialog with a company with low ROE and issues in its attitude toward shareholder returns We have actively offered suggestions to a management owned company with a low ROE and a low payout ratio to improve ROE and provide more aggressive return to shareholders. We are beginning to see specific changes, such as agreeing to review shareholder returns. Dialog with a company with low ROE and issues in its attitude toward shareholder returns Since the policy on returning to shareholders and capital are not clear with a poor awareness of capital efficiency, we have voted against the appropriation of surpluses and conducted interviews every year. We will strive to share common views by continuously communicating institutional investors concerns to the company. Dialog with a company that has governance structure and antisocial act issues The company had no outside director and had frequent accidents in its factory. As a result of continuously exchanging opinions on its governance structure, a resolution to introduce outside directors was adopted at this year s general meeting of shareholders. 9
1. Introduction 2. Interviews with s 3. Corporate Engagement 4. Exercise of Voting Rights for Japan Equity 5. Future Initiatives 10
4. Exercise of Voting Rights for Japan Equity Voting Activity (Companies w/accounting Settlement From April 2013 To March 2014) Total Item Total (%) Vote For (%) Vote Against (%) Previous Year's Vote Against (%) 52,736 100% 41,200 78.1% 11,536 21.9% 21.5% (c.f. Shareholder Proposal) 1,703 3.2% 41 2.4% 1,662 97.6% 97.0% By Item 52,736 100% 41,200 78.1% 11,536 21.9% 21.5% Board/ Derectors 14,268 27.1% 9,114 63.9% 5,154 36.1% 34.2% Supervisory Board/ Auditors 11,678 22.1% 9,582 82.1% 2,096 17.9% 20.5% Director Remuneration 5,233 9.9% 4,196 80.2% 1,037 19.8% 21.9% Appropriation of Surplus 11,887 22.5% 11,299 95.1% 588 4.9% 4.1% Capital Structure (*) 1,801 3.4% 1,056 58.6% 745 41.4% 37.4% Busness Restructure 336 0.6% 335 99.7% 1 0.3% 0.6% Incentives Improvement for Executives 1,384 2.6% 1,042 75.3% 342 24.7% 22.6% Other 6,149 11.7% 4,576 74.4% 1,573 25.6% 22.4% * Detail of Capital Structure Item Total (%) 11 Vote For (%) Vote Against (%) Previous Year's Vote Against (%) Takeover Defense Plan 1,446 2.7% 746 51.6% 700 48.4% 45.7% Capital Increase or Reduction 32 0.1% 32 100.0% 0 0.0% 2.7% Third Party Allotment of Shares 50 0.1% 50 100.0% 0 0.0% 7.1% Acquisition of Own Shares 108 0.2% 66 61.1% 42 38.9% 18.3%
4. Exercise of Voting Rights for Japan Equity Number of proposals voted and number of subject companies Voting rights were exercised on 52,736 proposals in total at general shareholders meetings for 15,725 companies whose fiscal year ended between April 2014 and March 2014, in which our twelve investment management institutions and thirty funds hold shares. Overview of voting Of 52,736 proposals voted, we voted against 21.9% (up 0.4% year-on-year; including 1,662 shareholder proposals). Voting on major proposals is described on the following pages. 12
4. Exercise of Voting Rights for Japan Equity Board of directors/ directors related proposals The percentage voted against was 36.1% (up 1.9% year-on-year). Major reasons were as follows: Election of an outside director who is considered to have independence issues. Increase of internal directors for which sufficient explanations have not been given. Election of a director who is considered to be responsible for poor business performance or antisocial acts. Case Company Reason for Voting against G E H Tokyo Stock Exch. (Rubber Products) Tokyo Stock Exch. (Info. &Comm.) Tokyo Stock Exch. (Retail Trade) Election of an outside director considered to have independence issues Since the outside director candidate proposed was from a large shareholder and therefore has independence issues, we voted against. Increase of internal directors without sufficient explanations Voted against all of the directors elections because the reason for increasing the number of internal directors is not clear and thus cannot confirm its rationale. Election of directors considered to be responsible for antisocial acts Voted against the re-election of the representative director because we were unable to confirm that measures for preventing recurrence and internal disciplinary actions were sufficiently taken. 13
4. Exercise of Voting Rights for Japan Equity Board of auditors/ auditors related proposals The percentage voted against was 17.9% (down 2.6 % year-on-year). Major reasons were as follows: Election of an outside auditor considered to have independence issues. Election of an auditor with low attendance rates to the board of directors/auditors. Case Company Reason for Voting against I J Tokyo Stock Exch. (Foods) Tokyo Stock Exch. (Construction) Election of outside auditors considered to have independence issues Voted against the election of a candidate from a firm that provides legal or other advisory services or an audit firm that provides audit services to the company. Election of an auditor with low attendance rates to the board of directors/ auditors Voted against due to the issue of low attendance rates to the board of directors/ auditors. 14
4. Exercise of Voting Rights for Japan Equity Director compensation related proposals The percentage voted against was 19.8% (down 2.1% year-on-year). Major reasons were as follows: Retirement allowance payments to outside directors and auditors Director compensation to directors considered to have the responsibility for antisocial acts Case Company Reason for Voting against K F A Tokyo Stock Exch. (Service) Tokyo Stock Exch. (Electric Appliances) Tokyo Stock Exch. (Pharmaceutical) Retirement allowance payment to outside directors and auditors Voted against the retirement allowance payment because the recipients are not proper (i.e., including outside directors and auditors). Directors compensation payment to directors considered to have the responsibility for antisocial acts The company engaged in antisocial acts. Voted against directors compensation payments, considering their responsibility for damaging shareholder s value. Others Voted against a proposal to increase compensation because it lacked rational reasons. 15
4. Exercise of Voting Rights for Japan Equity Appropriation of surplus related proposals The percentage voted against was 4.9% (up 0.8% year-on-year). Major reasons were as follows: Appropriation of surplus proposed by companies whose shareholder returns are insufficient such as low payout ratio. Case Company Reason for Voting against L G Tokyo Stock Exch. (Wholesale Trade) Tokyo Stock Exch. (Electric Appliances) Appropriation of surplus proposed by a company whose shareholder returns are insufficient such as low payout ratio Voted against the proposed appropriation of surplus because of its payout ratio and ROE were low. Appropriation of surplus proposed by a company whose shareholder returns are insufficient such as low payout ratio Voted against the proposal because its equity capital ratio, cash holding, and total payout ratio were not balanced with shareholder returns due to excessive retained earnings. 16
4. Exercise of Voting Rights for Japan Equity Capital structure related proposals The percentage voted against was 41.4% (up 4.0% year-on-year). Major reasons were as follows: A takeover defensive measure proposal was not considered to contribute to enhanced shareholder s value. Case Company Reason for Voting against K Tokyo Stock Exch. (Chemicals) A takeover defensive measure was not considered to contribute to enhanced shareholder value Voted against the proposal because it was not clear that the defensive measure would enhance shareholder s value. 17
1. Introduction 2. Interviews with s 3. Corporate Engagement 4. Exercise of Voting Rights for Japan Equity 5. Future Initiatives 18
5. Future Initiatives Corporate engagement We will continue our interviews with each investment management institution with respect to its corporate engagement activity covered this year as well as new engagement examples. Although it is difficult to measure engagement outcomes, our expectation to them is that they yield fruit over the long term. We especially expect investment management institutions to make further improvements in the following points. Is the engagement objective clear? Is the engagement progress properly managed? Are the engagement initiatives operated efficiently? Revision of the Guidelines for Exercising Voting Rights In line with changes in external environments, such as the revision of the Companies Act and the establishment of the Corporate Governance Code, we will revise the Corporate Governance Principles of Pension Fund Association for Local Government Officials and the Guidelines for Exercising Shareholders Voting Rights as necessary. We will also consider our approaches to exercising voting rights for foreign stocks, which we currently do not exercise. 19
DISCLAIMER When there are any discrepancies between original Japanese version and English translation version, the original Japanese shall prevail. 20