RMB Capital (RMB), a Chicago-based investment firm, submitted its opinions to Japan Exchange Group Inc.s (ticker 8697 JP) Tokyo Stock Exchange (TSE) regarding the potential revision of the cash equity market structure. RMB asserts that splitting the listed companies by market capitalization is not in the best interests of the market participants. Instead, RMB believes revising the listing criteriafrom the viewpoint of improving corporate governance and protecting minority shareholderswill improve the quality of the publicly listed companies in Japan.
(1) RMB opposes splitting the TSE First Section by market capitalization
- RMB strongly opposes the idea of splitting the TSE First Section by market capitalization (whether 50bn yen or 100bn yen), asserting that such a major change in the TSE First Section listing standard would fundamentally alter the constituents of the TOPIX Index. If implemented, RMB believes it would:
- Force a massive sell-off by passive investors due to their portfolio rebalancing requirement;
- Have a disproportionately adverse impact on small- and mid-cap stocks, despite their fundamental values; and
- Permanently damage the Tokyo markets stability and consistency, thus eroding the quality of the TSE as a stock marketthe exact opposite result of TSEs stated goal.
- RMB believes that too much emphasis on the market capitalization criteria has only downside, as companies teetering near the threshold may resort to aggressive actions to maintain their market capitalization. Further, for companies that are large enough to clear the threshold, it provides no additional incentive for them to improve their corporate value.
- Rather, we propose applying new listing criteria (discussed below) to all existing listed companies across market capitalization and raising the corporate governance standard of the entire Tokyo market.
(2) RMB proposes new listing criteria to enhance corporate governance
- RMB believes new listing criteria based on the Corporate Governance Code should be added to improve the quality of the listed companies. More specifically, RMB suggests two mandates for publicly listed companies:
- Establish nomination and compensation committees
- Ensure majority of board members are outsiders
- Regardless of the size of the market capitalization, RMB believes many recent corporate scandals could have been prevented if these two mandates had been in place.
(3) RMB proposes omitting listed subsidiaries and family-owned companies from TSE First Section
- RMB believes TSE should consider eliminating companies with controlling shareholders from the First Section. For example, publicly listed subsidiaries (majority is owned by its parent companies) and family-owned companies (majority is owned by founders or management) should be downgraded to the TSE Second Section unless such ownership percentages decrease below one-third of the total outstanding shares after a certain period (such as three years).
- RMB asserts the potential conflict of interest between controlling shareholders and minority shareholders is an imminent corporate governance issue unique to Japans stock market. RMB believes revising the listing requirement will resolve this issue and raise the quality of the Tokyo stock market significantly.
(4) RMB supports revising TSE step-up criteria
- RMB agrees that the TSE step-up criteria from Mothers to the First Section should be revised. The current threshold of a mere 4bn yen in market capitalization is significantly lower than the requirement for direct listing to the First Section, which is 25bn yen market capitalization. RMB proposes implementing a threshold of 25bn yen market capitalization going forward for step-up companies, while allowing existing TSE First Section companies to be grandfathered.