About Kabunushi (Shareholders) Ombudsman
Its Goals and Activities

According to the Tokyo Stock Exchange for fiscal 2000, individual investors owned 26.3 percent of all stocks. Corporate shareholders putting together financial institutions (37%) and business corporations (22.3) owned approximately 60 percent. Foreigners (mainly institutional shareholders) owned 13.2 percent.

In Japan, there is a cross-stockholding system, in which "stable corporate shareholders" own together a majority of each other's stocks. Although they are able to exercise overwhelming control through the system, they don't intervene in management each other at ordinary times. They usually approve corporate directors' proposals at the annual meetings by giving blank powers of attorney. Individual investors' interests consequently receive little attention.

Along with stable corporate shareholders, there are two different types of special shareholders; one is an employee shareholder and other is a "sokaiya". In almost all cases, employee shareholders enter a meeting hall before ordinary shareholders, and take seats in front of the place and say "No objection" and "Next item" in chorus to expedite proceedings. Sokaiya are known as professional troublemakers who extort money from corporations by threatening to cause trouble at the shareholders' meeting. But to tell the truth they often get money by acting as agents and fixers for companies. Companies make use of sokaiya to settle many kinds of trouble, to collect underground information, and to suppress common shareholders.

The majority of companies hold their shareholders meeting on the same day in June on the pretext of countermeasures against sokaiya. A large number of meetings end in less than 30 minutes leaving no time for questions from the floor. The Japanese style of shareholders meeting is therefore called a "Shan Shan" (clap clap) meeting.

Under these circumstances Kabunushi Ombudsman (KO) was founded in Osaka on January 8, 1996. It is a nonprofit organization consisting of lawyers, accountants, scholars, individual shareholders and other citizens. This is the first civic shareholders' group organized to keep watch on the activities of businesses in Japan.

The KO is dedicated to the goal of reforming Japanese management practices to incorporate the views of ordinary shareholders and citizens. First, we will monitor corporate activities, criticizing antisocial acts by corporations. Second, we will exercise the legal rights of common shareholders, using lawsuits as necessary to force disclosure. Third, we will introduce a shareholder proposal, which is a shareholder's (usually, group of shareholders') recommendation or request that a company and/or its Board of Directors take a particular action from the standpoints such as corporate transparency, democracy, equity, social justice and the environment. Fourth, we will praise and publicize those corporations that improve working conditions, practice philanthropy, protect the environment, employ the handicapped, promote gender-equality, and engage in full disclosure of their activities.

Our activities started when people were angry at the government scheme that spent a huge amount of taxpayers' money to liquidate bad loan losses of the failed seven housing loan companies without accountability. When we operated a hot line to receive information from individual shareholders of those housing loan companies and their "mother" banks, around some hundred shareholders of Nihon Jutaku Kinyu, which was the largest housing loan company, expressed their anger against the company and the government. And then we filed the five proposals for the shareholders' meeting on June 26, 1996, to disclose the truth and to oppose the governmental liquidation scheme. Although these resolutions resulted in rejection, nearly one third of the stocks voted for the shareholders' proposals.

We have carried on campaigns to open a closed shareholder' meeting. One of successful example of our campaigns for such purpose is the Sumitomo Corporations' case. On June 14, 1996, the Sumitomo announced that its star copper trader had lost 1.8 billion dollar over ten years. The Sumitomo's president at the time, Tomiichi Akiyama, expressed his regret but didn't disclose the truth to shareholders at the general meeting which was held on June 27, 1996. The meeting came to a close in 40 minutes while many employee shareholders shouted occasionally "no objection," "oh yes," and "next item." A shareholder, Kazuyoshi Yuoka who joined the KO later, asked Akiyama's responsibility for the illegal trade. But his next question about retirement bonuses of directors concerned in the affair was not accepted with employee shareholders' shouting. Yuoka brought the case before the Osaka District Court to stop such a "Shan Shan" meeting. And then he brought a derivative suits against Sumitomo's directors to pursue the responsibility for the losses. Thought the lawsuit itself was rejected, the court criticized a "Shan Shan" meeting, as follows. "If a corporation arranges rehearsals for the meeting and expedite the proceedings with shouting, such a shareholder meeting might be invalid". As a result, a great many general meeting of Japanese corporations stopped employee shareholders shouting in their annual meetings.

Other examples of our activities are shareholders' derivative suits against corporate directors. Derivative suits brought up by the KO amount to about 12 cases for five years from 1996 to 2001, such as Takashimaya (department store) in 1996, Sumitomo (trading company), Nomura (stock company), Ajinomoto (food company), Daiichi-kangyo (bank) and Yamaichi (stock company) in 1997, Japan Airlines (1999), Kobeseikosyo (steel company) in 2000, Mitsubishi Motorcar in 2001 and so on. The KO won out-of-court settlement, in seven suits, and other many suits still continue. In consequence, some companies decided to break off relations with sokaiyas. These derivative suits have also contributed to disclose hidden information and to promote corporate reforms.

Talking about the derivative suit against of Sumitomo Trading Corporation, on March 16, 2001 at the Osaka District Court, it resulted in an out-of-court settlement in which five former executives of the company agreed to pay 430 ($3.6) million to indemnify some part of huge losses from illegal copper trading. Regarding the case of the JAL we reached a settlement at the Tokyo District Court on May 17, 2001. The company has violated a law requiring 1.8 percent of its work force to be made up of the disabled, and paid 40-50 million yen annually, which is a sort of penalty, to the government for long years. According to the term of the settlement, the JAL will raise the percentage of disabled employees, currently 1.29 percent, to the nationwide average of 1.49 by fiscal 2003, and to the legally mandated figure by fiscal 2010. The company will also post its progress on its Web site.

Recently the KO filed derivative suits against directors of two life insurance (mutual-aid) companies, Nihon Seimei and Sumitomo Seimei, for their political donation to the Liberal Democratic Party. The amount of the donation by both companies totaled around eight hundred million yen for last ten years. The two companies' directors in charge of political donation explained in the court that they had contributed a large sum of money to LDP to support market economy or free economy. In 1970 the Supreme Court decided that a corporation as a juristic person has freedom of political activities just like a natural person, therefore political donation by companies were acceptable. But the political situation and public opinion have changed since the decision. Nevertheless, on July 18, 2001, the Osaka District Court rejected the plaintiff's claim and supported the decision of the Supreme Court on June 24, 1970, with the reason that a juristic person has the same rights of political activities as a natural person. The KO took its appeal to the Osaka Higher Court immediately.

Last year the KO also filed derivative suits against directors of Kumagayagumi (construction company). Because they have continued political donation to the Liberal Democratic Party, although the company have obtained debt forgiveness from their main banks because of asset deficiency in fact. The KO considers that a construction company's political donation to ruling party is a sort of bribe, which affects an order for public works construction.

Another type of shareholders' lawsuit is one against an audit corporation, which took part in window-dressed accounts. Recent collapses of banks and stock companies have revealed acts of window-dressing with adding up fictitious profits and concealing huge losses. It became clear that almost all of failed financial institutions shifted bad loans to its subsidiaries (including simple paper companies). As a result, more than several top executives were arrested on suspicion of acts of window-dressing. But auditors who took part in making false accounts had been never punished, although such acts were violations of the Securities and Exchanges Law and Commercial Code. This situation will change soon because shareholders' lawsuits against some audit corporations have been brought to court under the support of the KO.

Japanese corporations are being forced to disclose more information. The group of individual shareholders organized by the KO presented the first-ever resolution on pay at the Sumitomo Bank shareholder meeting on June 29, 2000. Its proposal asks the company to change its bylaws to require release of director salaries and retirement bonuses. The shareholders resolution itself was rejected at the general meeting of Sumitomo Bank. But the president Yoshifumi Nishikawa announced that the bank paid 800 million yen in retirement bonuses to four directors who retired before the meeting, and that the highest annual salary the bank paid to a director in fiscal 1999 was 45 million yen and the average was 30 million yen. The Daily Yomiuri (July 4, 2000) said that it was the first time the president of a major commercial bank had disclosed details of salaries or retirement bonuses of top executives at a shareholders meeting.

In 2001 we filed a similar proposal to SMBC (Sumitomo Bank and Sakura Bank merged to start a new as Sumitomo Mitsui Banking Corporation on April 1, 2001). In the same way of Sumitomo Bank in 2000, the shareholder resolution resulted in rejection, but the president announced not only the total amount of annual salaries of directors and corporate auditors but also the highest and average amount paid each director and corporate auditor at the meeting. Talking about the voting result at the general meeting of SMBC on June 26, 2001, 7.2 percent of shareowners voted for the resolution proposed by the KO. The total was more than twice the number that backed a similar proposal at Sumitomo Bank in 2000.

This year we already filed two shareholder's proposals against MSBC and Sony. The first proposal asks their boards of directors to amend their articles of corporation so that details of individual directors' salaries and retirement bonuses are made public. The second proposal asks them to amend its articles of corporation so that the board nominates two sexes accordance with the principles of the law for gender-equal society. We are willing to engage in talks with Sony. If Sony undertakes to some progressive reforms, we might withdraw our proposals.

Besides we are preparing to file another proposal against Snow Brand Milk Products, which set up the food-poisoning case in Osaka Plant in 2000 and the beef disguise case in the affiliate company this year. The proposal asks Snow Brand to elect an independent outside director who is nominated by nation -wide consumer groups and takes charge of food safety system, and to establish a permanent safety monitoring committee. The company had a contact with us and said that they would be ready to accept our proposal. We will have negotiations with the top executives of the Snow Brand after gathering enough letters of proxy to file a shareholder proposal.

In addition to those activities mentioned above, we have investigated actual conditions of corporate governance and management, such as annual shareholders' meetings, disclosure,employment of the disabled, gender-equality, and food safety system with questionnaires to companies. And we have posted up the results of those findings on our Web site and released them to the media.

In Japan the business system, especially the relations between banks and corporations has changed since the 1980s because of increasing self and equity finance, and decreasing bank loan. The financial crisis after the bubble burst at the beginning of the 1990s has accelerated a decline in the role and position of banks under pressure of a huge amount of bad loans and losses. Consequently the Japanese style of corporate governance, which had been characterized by the cross-stockholding system among stable corporate shareholders, in connection with bank centrality, has fallen into a serious crisis. At the same time frequent corporate scandals, which are responsible to executives, such as bribery, fraud, window depressing and off-the-book money to sokaiya, have been exposed. The KO's movement for reforms to corporate governance that started in the late 1990s has been one of a social response to the recent crisis of the corporate governance in Japan. And the KO has had some success in pressuring Japanese corporations to implement democratizing governance reforms.

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