Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.

Japan’s AGM season: Looking to next year and beyond

We will support reforms that ensure AGMs in Japan deliver accountability more inclusively.

 

One infamous feature of the Japanese market is the condensed annual general meeting (AGM) season, in which 70-80% of AGMs occur in a single week near the end of June.[1]

This timing of AGMs in Japan has historically put unnecessary time pressure on both companies and audit firms. Most European, North American and many Asian countries require AGMs to be held within four to six months from the end of the business year.

Japanese companies, on the other hand, have traditionally had just three months to conduct two different audits. The “first” audit is required under the Ministry of Justice’s (MOJ) Companies Act, and the “second” is required under the Financial Services Agency’s Financial Instruments and Exchange Act (FIEA). The company must then prepare for the AGM, which includes translating documents into English.

Whereas large institutional investors have access to company boards throughout the year, the AGM is the only occasion for smaller investors to question the board directly. So what can companies and regulators do to make the AGM as accessible as possible?

Change the record

We believe that changing the record date[2] is a reasonable solution. While the Companies Act requires AGMs to be held within a certain time from the record date, the MOJ has made it clear that this does not mean that a company with a year end in March must conduct its AGM by the end of June.

By separating the record date from the year end, companies won’t need to hold the AGM within three months of the close of the business year. Companies that move the record date closer to the AGM will also find themselves more in line with global practice.

Having more time to prepare for the meeting will make it possible for the AGM season to be less concentrated. For investors, this could mean:

• Higher audit quality as a result of less time pressure

• Access to the Annual Securities Report (“Yuho”) with the full set of accounts and accompanying notes per the “second” or FIEA audit, well ahead of the AGM

• Additional time to make voting decisions as a result of materials provided earlier[3]

• More AGM materials translated into English

• More opportunities for investors to attend AGMs (due to fewer meeting clashes) to question the board in a public forum to hold directors accountable

What regulatory reforms do we want to see?

We would be supportive of regulatory reforms that would:

• Require one audit (not two) that is finalised well before the AGM

• Revisit the quarterly reporting requirement

• Ideally extend the AGM window

Firstly, streamlining the disclosure requirements for the pre-AGM business report and financial statements (subject to the “first” audit) with the Yuho (subject to the “second” audit) – and in turn requiring only one audit instead of two – would save companies a considerable amount of time and money. This would also benefit investors who would then be able to base their voting decisions on the Yuho. While there have been years of discussions on merging the reports, we believe this should be complemented by an extended AGM window.

Secondly, companies have told us that the mandatory quarterly reporting requirement presents a barrier to moving the AGM later in the year.[4] Some audit professionals additionally claim that the quarterly review takes up resources that would otherwise be allocated to the year-end audit. While there are mixed views among investors, we believe that quarterly reporting is not the best use of executives’ time and can be a cause of undue short-termism.[5]

Lastly, an extended AGM window that gives companies more time for audit and AGM preparation would have the positive implications discussed above without making companies change the record date.

The way forwards

In a year like no other, many companies have decided against the tradition of handing out gifts at the AGM.[6] The more fundamental decisions a company makes this year on how it conducts the AGM will speak louder than words on the value it places on health and safety, audits, and shareholder accountability.

While technology is starting to change the traditional physical form of AGMs, many longstanding issues will remain after the pandemic. We will be supportive of reforms that ensure AGMs function as a more inclusive accountability measure.

In our previous blog on Japan’s AGM season, we explained why the COVID-19 crisis hasn’t led us to make any changes to our voting policies.

 

 

[1] This is for companies with a March year end. This year, 81% of AGMs will be in a single week and 33% (747 companies) will be on a single day (Friday 26 June).

[2] Postponing AGMs this year would also have required companies to change the record date. This is why we have been particularly supportive of companies if this shift could be permanent.

[3] Although the Corporate Governance Code has encouraged more companies to provide the convocation notice and supporting documents earlier than the legal requirement, companies are only required to disclose proxy materials 14 days before the meeting.

[4] This year, the quarterly reporting deadline was extended.

[5] The EU and UK removed the mandatory quarterly reporting requirement years ago and the FT later wrote that a “UK boss sticking to quarterly reporting is more likely to attract investor ire than those ending the practice.”

[6] Nikkei article (in Japanese)

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