Toyota’s Daihatsu plan meets criticism
TOYOTA Motor’s $3.1bn bid to buy out Daihatsu Motor Company has run into shareholder and proxyadviser criticism for being on the cheap, highlighting corporate governance challenges years into Japan Inc’s push to become more investor friendly.
Arga Investment Management, a Stamford, Connecticut-based fund that owns a 1.4% stake in Daihatsu, wants a 73% increase in the share-exchange ratio that the car makers announced in January. Institutional Shareholder Services (ISS), which advises investors on board proposals, opposes the terms and calls them “disadvantageous to minority shareholders”.
A vote by Daihatsu shareholders on Wednesday puts the spotlight back on Toyota one year after criticism by ISS and some investors against its creation of a class of shares that could not be traded for five years. As Prime Minister Shinzo Abe’s administration calls on Japanese companies to add independent board members and boost shareholder returns, Toyota is attempting to take over a 51% owned affiliate that lacks a truly independent director, according to Arga and proxy advisers ISS and Glass Lewis & Company.
“It’s bad for Toyota’s image,” Arga chief investment officer A Rama Krishna said. “You’ve got the administration trying to make a big case for corporate governance. Here’s the largest corporation in Japan flouting every corporate governance rule you can think of.”
Toyota said in January it expected to offer a 0.26 share for each share of Daihatsu in an exchange of stock scheduled for August 1.
In Daihatsu, Toyota president Akio Toyoda sees the potential for a global small-car brand that can be valued similarly to BMW’s Mini.
The criticism by Arga and ISS of the car makers’ share exchange has less to do with the strategy and more to do with the price. Arga contends that Toyota is valuing Daihatsu cheaply relative to its Japanese minicar-making peer Suzuki Motor and is buying its majority-owned affiliate at a cyclical trough in Daihatsu’s earnings and share price.
“The structure of Daihatsu’s board could be a contributing factor to a merger ratio which appears to be disadvantageous for the company’s minority shareholders,” ISS said in a June 14 report.
While Glass Lewis said the Daihatsu board’s lack of independent directors raises “serious concerns about its objectivity, independence and ability to perform proper oversight”, the adviser said it supports the firm’s merger with Toyota.
Both ISS and Glass Lewis recommend shareholders vote against Mitsui’s election as director as a way to hold top management accountable for the board’s lack of independent members.
Daihatsu responds to investor inquiries and has explained to shareholders that it used a thirdparty assessment and took steps to protect minority shareholders and ensure fairness, the firm said.
Abe’s government introduced a governance code last year that called on companies to name two independent directors. It also backed stewardship principles for institutional investors and a stock index designed to showcase Japan’s most efficient companies.
Japan’s car companies ranked among the worst sectors in a Jefferies Group report in March on board structures within the Topix 500 index. Equity analyst Zuhair Khan scored Toyota at 20 and Daihatsu at five out of a maximum 270 in ratings that considered board attributes such as outside influence, diversity, skills and shareholder alignment.