The improvement of M&A rules and the regulation of investment funds are critical issues in Japan, as elsewhere. Investment funds, including hedge funds and private equity funds, have been forced to face rapid capital drain and have lost momentum due to the global financial and economic crisis which began in 2008.
However, many workers employed by companies owned by investment funds remain under unstable circumstances, and these workers may find themselves in far harsher conditions if investment funds hard-pressed for capital resell their stock holdings.
RENGO considers that a transparent system for consolidating M&A rules and regulating investment funds should be established immediately, regardless of the economic situation.
“A RENGO Perspective on the Corporate Legal Framework and Investment-Fund Regulations” was drawn up and adopted by the Central Executive Committee meeting in January 2009. Prior to this, RENGO sent a mission to the US and the UK to investigate specific systems for implementing M&A rules and investment fund regulations in both countries, and their actual management.
Taking into account Japan’s legal system and corporate culture, RENGO considers that UK-type ex-ante M&A regulations are appropriate for Japan. Concerning investment fund regulations, however, we recognize that it is necessary to strengthen tax measures against fund manager remunerations, as is currently being discussed in the US. Rules for tax havens, as discussed by G20, are also important. Moreover, as pension investors we need to call on investment funds to implement socially responsible investment.
A RENGO Perspective
on the Corporate Legal Framework
and Investment-Fund Regulations
RENGO - Japanese Trade Union Confederation
Adopted by RENGO Central Executive Committee
at its 16th Session, 22 January 2009
Amidst the wave of globalization, economic and financial management based on market fundamentalism in the advanced economies has led to a concentration of wealth and to the expansion and fixation of disparities on a world scale. Avaricious speculative flows of funds, which are far dissociated from the real economy, have overwhelmed all the markets around the world and the financialisation of the economy has cast a dark shadow over the real economy.
Under this situation, cases have arisen where investments funds (*), which only see companies as targets to buy and sell, have, using huge capital backing and the principle of the shareholder supremacy, carried out repeated takeovers and restructuring without giving heed to the interests of various stakeholders including workers, leading to employment and labor disputes, or to the outflow of profits that would normally be distributed to workers. Also, as international competition between companies intensifies, they are staking their survival on reorganizations, including through hostile takeovers and other M&A activities, and there has been significant debate in various forums on “what is the value of a company?”
On the other hand, there has been growing demand for institutional investors, who provide money to investment funds, to carry out “socially responsible investment” (SRI). The international trade union movement has been involved in efforts to impose a certain degree of discipline onto corporate behavior and the financial market through the investment of pension funds, reserves for retirement allowances, etc. These efforts are proliferating thanks to the launch of the United Nations Principles for Responsible Investment, which call on pension funds and others to give consideration to environmental, social, and corporate governance (ESG) issues.
In September 2007, RENGO forged “A RENGO Perspective on Approaches and Policy Issues Concerning Hedge and Private Equity Funds,” and confirmed that concrete policy proposals would be set out separately at the its Policy Committee. RENGO has also continued to be involved in activities such as the dispatch of investigation teams (to UK in November 2007 and the US in June 2008) concerning financial markets and investment-fund regulations, and exchanges of views with various national centers at TUAC.
Based on this experience, we decided to forge a RENGO’s view on the corporate legislation and investment fund regulations.
With the financial crisis triggered by the so-called sub-prime mortgage problems, the speculative bubble collapsed leading to impasse for market fundamentalism. With regard to the challenges and future direction for international financial market reform, we intend to conduct further investigations including in cooperation with ITUC and TUAC.
* The term “Investment fund” here refers to activist-type investment funds, etc., which collect money by borrowing sums greater than their own funds, do not have the intent to manage companies, and aim only to obtain high dividends and to artificially raise share prices, brandishing the principle of shareholder supremacy.
1. Basic view
(1) Establishment of transparent regulations and systems in the financial capital market
At present, even as the Japanese Company Law and Financial Instruments and Exchange Law are being revised, companies continue to use legal loopholes to carry out takeovers. Further, excessive defense measures have been introduced and used to fight takeovers, putting into relief the underdevelopment and lack of rules concerning takeovers and defenses against takeovers. On the other hand, some argue that “if the regulations concerning takeovers and takeover defenses are strengthened, investment capital will flow out of the Japanese market.”
However, in advanced economies such as the United States and United Kingdom, there are various laws and systems to protect national companies and nurture a healthy financial market. In Japan, where rules and systems are comparatively underdeveloped, there is a need to establish transparent regulations and institutions governing corporate takeovers in order to make possible the healthy and sustainable development of the Japanese economy and financial market.
(2) Introduction of pre-bid takeover rules
In Japan, many listed companies have introduced US-type anti-takeover measures (poison pills). However, the financial market operation system in the United States, where the Federal and State laws are deftly applied in accordance with the situation and where the Securities and Exchange Commission (SEC) watches over the market with strong investigation authority, is quite different from that of Japan.
Furthermore, there is a major problem with the use of post-bid takeover rules. Even if a takeover attempt is successfully fought off, a large amount of money must be used for the introduction of defensive measures, legal costs, etc., with the result being that the profit accumulated within the companies based on the efforts of workers over many years, flow out and are not distributed to the workers.
In the UK, by contrast, the process governing corporate takeovers (City Code on Takeovers and Mergers) contains clear stipulations. It imposes, on investors intending to acquire a 30% or greater share in a firm, mandatory cash bid rule and requires them to include the business and employment plan in the public tender document. Further, the management and employees of the target company are guaranteed the opportunity to express their views on the takeover offer in question. As a result, activist-type takeover offers without financial backing or the intention to operate the company after the takeover are no longer possible in the UK. Thus, considering the differences in legal systems, the effects on the capital market, the costs to be borne by companies, etc., it seems that a pre-bid takeover rule would be more suitable for Japan than post-bid regulations.
(3) Importance of investment-fund regulation and socially responsible investment
As a result of the recent financial crisis, there has been a rapid outflow of capital by investment funds. However, under a situation of incomplete information disclosure, investment funds continue to try to escape from taxation and avoid confronting workers. To improve this situation, we must strengthen regulations concerning the transparency and taxation of investment funds, based on international cooperation.
It is also problematic that workers’ capital, in forms such as pension funds, ends up, through investment funds, having the effect of making employment unstable, and thus turns out to be a cause for the deterioration of working conditions. In the West, in particular, an increasing number of pension funds now monitor the effects of their investments on employment and working conditions at the companies where they put their money, and oblige the fund trustee to give consideration to the workers at acquired companies. Japan must also incorporate consideration for the effects on employment and labor conditions into the policies for the operation of pension funds, etc.
2. Concrete views
(1) Views on the development of corporate legislation
(a) Reviewing corporate governance
While incorporating the concept of workers in corporate law, develop corporate legislation in order to achieve corporate governance that gives consideration to the interests of various stakeholders rather to just the interest of shareholders. Develop rules of operation for information disclosure at non-listed companies.
+ Change the interpretation of the nature of companies based on the principle of shareholder supremacy and stipulates that the members of the board of directors have a duty to secure the sustainable growth of the company, and to give consideration to the interests of not just the shareholders but also of various stakeholders, including workers.
+ Based on the above, treat employees not as “signatories of employment contracts concluded with the manager who is entrusted management of the company by the shareholders,” but as important actors in carrying out the business activities of the company and realizing more appropriate corporate governance.
+ Establish the right of listed companies to investigate their true shareholders as a countermeasure to the increase of shareholding by investment funds and trust accounts.
+ Review the implementation of, and thoroughly carry out, financial reporting by non-listed companies. Concretely speaking, change the standard for financial reporting (disclosure of balance sheet and income statement) from amount of capital to sales or number of employees, and develop rules to ensure its implementation, such as the publication of the names of violating companies.
(b) Developing rules on corporate takeovers
Draw up rules governing takeovers of listed companies (a Japanese version of the UK City Code) and achieve transparency in the negotiating process and content of takeovers. The responsibility for the implementation of the Japanese City Code should be assumed by an institution specializing in corporate takeover regulation with a legal basis.
+ Draw up a transparent pre-bid rules for takeovers of listed companies (Japanese version of the UK City Code) and make the takeover process transparent through the publication of the negotiating process and content of takeovers.
+ Lower the standard for the mandatory bid obligation in the Financial Instruments and Exchange Law from “when the ratio of possession of shares etc. after public tender exceeds two thirds” to “one third.”
+ The party proposing a takeover should publicize, in written form in the tender document, its strategy toward the target company or its business, employment of its workers after the takeover, and disclosure of information about itself if it is not a listed company. In addition, representatives of the workers of the company to be acquired should be guaranteed the opportunity to express their views on the tender offer.
+ The institution specializing in corporate takeover regulation should, as a public institution with a legal basis, be given responsibility for drawing up, implementing, and revising the rules concerning corporate takeovers. Members of the institution specializing in corporate takeover regulation should be chosen from the government, financial institutions, private companies, lawyers, trade unions, etc.
(2) Views on the regulation of investment funds
(a) Thorough implementation of transparency and disclosure of information regarding investment funds
Secure and improve the transparency of investment funds through information disclosure. Additionally, require that investment funds thoroughly implement an investment policy with the objective of ensuring the long-term stability and growth of the financial market.
+ In order to ensure the transparency of investment funds, require information disclosure, including financial reports, investment strategy, debt structure, commission system, incentive system for fund managers, etc.
+ For the inspection and supervision system of the collective investment scheme through the Financial Instruments and Exchange Law, carry out, in addition to the inspection and supervision from the viewpoint of protection of investors, inspection and supervision with the added viewpoint of preventing systemic risk and thoroughly implementing an investment policy with the objective of ensuring the long-term stability and growth of the financial market. Secure sufficient personnel for inspection and supervision.
(b) Taxation of investment funds
While strengthening taxation of the profits of investment funds, impose appropriate taxes on the rewards of fund managers. Additionally, prepare conditions for the taxation of investment funds set up in tax havens.
+ Eliminate preferential treatment for dividends and capital gains in the income tax. Also, while introducing a taxpayer identification system, change the taxation on financial income from separate to comprehensive taxation. Raise the taxation rate on financial income to 30% during the period until a system of comprehensive taxation is introduced.
+ Place limits on measures in the corporate tax to exclude dividends received on profits when an investment fund which is a corporate body receives excessive dividends and fees from an acquired company.
+ In revising tax treaties, while securing the taxation rights of Japan, endeavor to raise the withholding rate.
(c) View on the concept of investment funds as employers
While clarifying the definition of the identifiability as an employer, develop guidelines for building good industrial relations between investment funds, etc. and acquired companies and the workers of the acquired companies, and develop conditions to enable the provision of guidance to investment funds.
+ Clearly stipulate in the Labor Law that investment funds also fall under the category of employer when they have acquired a certain share in a company and have influence on the acquired company in terms of both quality and personnel through measures such as appointing members of the board of directors of the company.
+ Based on the Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy (*1), the OECD Guidelines for Multinational Enterprises (*2), and the Report of the Study Group Concerning Industrial Relations at Companies Acquired by Investment Funds, etc. (May 26, 2006, Ministry of Health, Labor and Welfare), draw up guidelines for building good industrial relations between investment funds, etc. and acquired companies and the workers of the acquired companies. Also, develop conditions for providing guidance to investment funds based on those guidelines in terms of the recognition of the concept of employer and the importance of collective bargaining, obligation to give prior explanation concerning the management policy after acquisition, etc.
(d) International regulations
Draw up rules and regulations in cooperation with other advanced countries for the securing of transparency of investment funds, guaranteeing of workers’ rights, strengthening tax regulations, etc.
+ Establish a taskforce to draw up international regulations for securing the transparency of investment funds, guarantee the workers’ rights, strengthen tax regulations, promote corporate governance at non-listed companies, etc. in cooperation with OECD, IMF, and the Financial Stability Forum as key actors.
+ Establish within OECD a body to investigate and analyze, in an objective and neutral way, the long- and medium-term economic effects as well as effects on employment and working conditions of investment funds.
* Additionally, the international trade union movement, with TUAC and ITUC as key actors, has made proposals concerning a system for the regulation and control of the international financial capital market, which is fraught with problems triggered by the recent financial crisis
(3) Views on socially responsible investments
Investing bodies of public pensions and corporate pensions shall incorporate Environmental, Social (Labor), and Corporate Governance (ESG) issues into their investment policies, based on the United Nations Principles for Responsible Investment (PRI), in order to promote social responsibility of companies and protect workers at acquired companies.
+ The investing bodies of public pensions and corporate pensions shall sign the United Nations Principles for Responsible Investment (PRI) (*3), which calls for socially responsible investment on the part of institutional investors, etc. and incorporate the following items into their investment policies:
- In regard to the shareholders’ right to vote and sales of stocks, consider the state of adherence to the core labor standards (freedom of association and right to collective bargaining; the elimination of forced and compulsory labor; the abolition of child labor; and the elimination of discrimination in the workplace) of the companies where investments have been made.
- Ensure that the trustees (institutions), etc. understand the concept of protecting the workers of acquired companies and not changing working conditions, etc., to the detriment of the workers there.
+ In order to guarantee that problems do not arise in socially responsible investment from the viewpoint of fiduciary responsibility, enact a Pension Basic Law which regulates the management of pensions comprehensively, referring to the UK Pension Act (*4).
+ Change the composition of the committee which sets the organization and investment policy for investing bodies of public pensions, etc. to a structure where the views of the insured can be directly represented.
+ Concerning corporate pension funds, ensure that trustees representing workers understand investment issues. RENGO will issue “pension funds SRI guidelines” (tentative name) to workers’ trustee of corporate pension boards.
3. Action Plan
Based on these ideas, RENGO will, following the formulation of a concrete system for corporate governance and corporate takeover legislation, endeavor, in cooperation with experts on corporate , to achieve the revision and enactment of related rules and regulations of the Company Law, Financial Instruments and Exchange Law, etc. by having RENGO’s views reflected in advisory bodies such as the Legislative Council and Financial Council, while lobbying related ministries and agencies, political parties, etc.
In addition, RENGO will play an active role in pushing for the establishment of international rules concerning investment fund regulations through forums of the international trade union movement, principally TUAC and ITUC.
(Note 1) Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy
Adopted by the ILO Governing Body in 1977. Provides guidelines for multinational corporations, governments, employer organizations, and labor organizations concerning employment, training, working and living conditions, industrial relations, etc.
(Note 2) OECD Guidelines for Multinational Enterprises
Adopted by the OECD Ministerial Council in 1976 as a part of its Declaration on International Investment and Multinational Enterprises. Although it is a non-binding recommendation to the member governments of OECD concerning multinational corporations, its effectiveness has been strengthened through a 2000 revision, where it was decided to set up a national contact point to provide services such as helping solve individual disputes, in each country. Chapter 4, “Employment and Industrial Relations,” contains a stipulation on the observance of the core labor standards, prior notification of employees on changes in their operations which would have major effects including dismissals, etc.
(Note 3) The United Nations Principles for Responsible Investment (PRI)
Established by the United Nations in 2008. It is comprised of six principles calling on pension funds, investors, and the financial industry to incorporate the “Environmental, Social, and Corporate Governance” (ESG) standard into their management policy, ensure that it is reflected in shareholder actions (exercising voting rights), and call on companies into which they invest to carry out ESG disclosure.
(Note 4) UK Pension Act
Enacted in 1995. Following revisions in 2000, it now stipulates that if consideration is given to society, environment, and ethics in the choice, possession, and sales of shares, the degree should be disclosed.