October 26, 2021

Engagement Agenda “Issues Concerning Corporate Governance of ParentSubsidiary Listings”
Interim Report on Collective Engagement on Issues Concerning Corporate Governanceof Parent-Subsidiary Listings
The seven companies, namely The Dai-ichi Life Insurance, Meiji Yasuda Asset Management,
Mitsubishi UJF Trust and Banking, Pension Fund Association, Resona Asset Management, Sumitomo
Mitsui DS Asset Management, and Sumitomo Mitsui Trust Asset Management (in alphabetical order),the participants of the Collective Engagement Program presided by The Institutional Investors
Collective Engagement Forum (hereinafter referred to as “IICEF”), with IICEF as secretariat, perform
collective engagement with multiple listed companies on the corporate governance issues
concerning so-called parent-subsidiary listings.

From March 2019 onwards, as a preparation for formulating a common view of investors, IICEF, incooperation with ICJ, Inc., held a series of meetings to exchange opinions (collective hearings) withcompanies with parent-subsidiary listings. After formulating a common view of participating
investors based on facts and companies’ views on parent-subsidiary listings learned through thecollective hearings, from October 2020 onwards, we started collective engagement meetings withboth parent companies (hereinafter referred to as “the Parent”) and subsidiaries in some of theleading corporate groups with parent-subsidiary listings.
Through these collective engagement meetings, we have clarified “the corporate governanceissues concerning parent-subsidiary listings” and have compiled an interim report on them.
1. Outline of the Agenda
There are some positive views on so-called parent-subsidiary listings in Japan in terms of bringing
various benefits to management including benefits in fund-raising and securing human resources
while also stressing the function of incubating companies inherent in the process of listing
subsidiaries, etc. From the investors’ perspective, however, disadvantages have been pointed out,including the risk of certain “distortions” arising in the evaluation of stock prices as well as thepropensity for the risk of conflicts of interest (especially among shareholders).

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In many cases, passive investors and other major institutional investors participating in IICEF’s
Collective Engagement Program continue to hold both the shares of the Parent and thesubsidiaries, etc., in principle due to the nature of their investments. As shareholders of the Parent,
they have a keen interest in whether maintaining a parent-subsidiary listing is really the optimal
option from the perspective of long-term management and value enhancement of the group as awhole. Additionally, as shareholders of the subsidiaries, etc., they cannot help but be concerned
about the possibility of unfair impairment of the interests of minority shareholders of listed
subsidiaries, etc. IICEF believes that having members of management of both the Parent and thesubsidiaries, etc. become aware of these perspectives and concerns of the investors, consider
corporate governance measures to alleviate such concerns, and improve disclosure of relevant
information and their explanations to the investors, will be immensely productive as its program’scollective engagement agenda.
Investors’ awareness of the issues and primary concerns that should be re-acknowledged bymembers of management of listed Parent and subsidiary companies are described below. We
understand that they include issues that require discussions not only with members ofmanagement of either the individual Parent or the listed subsidiaries, etc., but also with membersof management of both the Parent and the listed subsidiaries, etc. When requesting theengagement dialogues, IICEF intends to hold dialogues concurrently with the members ofmanagement of both the Parent and the subsidiaries, etc. as much as possible.
 Wouldn’t it cause some sort of disadvantage to the minority shareholders of the listed
subsidiaries, etc.? Furthermore, wouldn’t there be a risk that this fact is having an adverse
effect on the evaluation of either the Parent or the subsidiaries, etc. or both on the stockmarket?
 Are the advantages of the reality of a parent-subsidiary listing great enough in terms of howeach company is managed and its value is enhanced? Even if there were no problems in thepast, couldn’t a potential conflict of interest become visible in the event of a “contingency”?
 Wouldn’t the emergence of minority shareholders as a result of the listing of thesubsidiaries, etc. become an obstacle to the optimum management strategies of the entire
group?
 What kind of discussions are made at a board meeting and other relevant dialogues on theissues above?

In particular, how do independent outside directors view this issue anddiscussions at a board meeting?
For the details of this engagement agenda and specific questions, please refer to the disclosurematerial dated October 8, 2020 (https://www.iicef.jp/pdf/en/pdf_en_20201008.pdf?20201116).
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2. Issues of parent-subsidiary listings further clarified through engagement and expectations forenhanced explanation by companies
As of September 30, 2021, including collective hearings in 2019, we have held collectiveengagement meetings with 18 companies (including both Parents and subsidiaries) belonging tosome of the leading corporate groups with parent-subsidiary listings. Through these meetings, wehave received the following explanations from those companies.
[Outline of explanations provided by companies](1) Companies proactively working on resolving parent-subsidiary listings〇 We listed a subsidiary originally as part of financing activities, and helped the subsidiary togrow through the listing of its shares. There were also other companies that became oursubsidiaries through the acquisition. Our policy as a Parent was to respect the autonomy andindependence of the management of subsidiaries and to refrain from meddling with theirmanagement. As a result, diversified management of our group has been successful.
〇 However, as the business environment has changed significantly in recent years, it has become
necessary for us to undertake a group-wide restructuring. As a result, it became increasingly
clear that there was a gap in the way of thinking between the Parent and the subsidiary.
Because we cannot force the subsidiary to change its management even if we want them to,
we have decided to undertake a group restructuring including delisting of the subsidiary (byeither acquiring 100% ownership or divesting our holdings).
〇 We expected that the group restructuring efforts would naturally entail various resistance. On
the other hand, the number of outside directors has increased at both the Parent and thesubsidiary, enabling discussions from an objective standpoint. We see this as one of theadvantages of such efforts.
(2) Companies that recognize the merit of the listing of subsidiary〇 We have listed subsidiaries as part of the group management strategy that aims to maximize
our consolidated financial performance. The directors of both the Parent and subsidiaries havea sufficient understanding of the management policies of the group as a whole including thelisted subsidiaries. In addition, the board of directors of the Parent discusses the capital
structure of the listed subsidiaries, etc. and the significance and the appropriateness of theirlisting as necessary from the perspective of group management.
〇 A listed subsidiary is expected to develop its own business independently, and its growth willcontribute to the enhancement of corporate value of the group as a whole, which is also in3

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consistent with the interests of its minority shareholders. Maintaining the listing status for a
subsidiary has advantages such as speedy decision-making, flexible corporate finance,recruitment, employee morale enhancement, and better business management at thesubsidiary.
〇 Recognizing that parent-subsidiary listings involve risks of structural conflict of interest, theParent ensures the independence of its listed subsidiaries by implementing an effective
governance structure at the subsidiaries. For example, while a sufficient number of
independent outside directors are elected, directors of the Parent do not concurrently serve
as directors of a listed subsidiary. In addition, a system is in place to check parent-subsidiarytransactions. For example, these transactions are subject to strict intercompany transaction
rules, are required to be reported to and approved by the board of directors (outside directors)of both the Parent and the subsidiary, and are monitored by a committee established at eachsubsidiary.
Through these engagement meetings, investors understood these companies’ policies on andapproaches to parent-subsidiary listings, their advantages and disadvantages, companies’ responses
to respect the independence and autonomy of the management of subsidiaries, initiatives to prevent
conflict of interest, and other various aspects of the actual situation. We also believe that thesecompanies understood the concerns of investors through the questions from them to theexplanations above.
[Gap in understanding between companies and investors from the investor’s perspective]
As stated above, detailed explanations have been provided from these companies throughcollective engagement meetings, which enabled us to deepen the understanding of their views.
However, investors continue to have governance concerns about parent-subsidiary listings.
These concerns of investors and the gap in understanding between companies and investors canbe summarized as the issues outlined below. IICEF will continue to hold collective engagement
meetings with companies to discuss these issues.
(1) Basic issues of parent-subsidiary listings〇 If a Parent respects the independence of the management of a subsidiary, there is no need tomaintain the parent-subsidiary relationship with the subsidiary, and it would suffice to enter
into a business alliance agreement with the subsidiary in the area of collaboration. Conversely,
if the Parent intends to increase synergies within the group as a whole, it should control thesubsidiary as a wholly-owned subsidiary. It is considered problematic that keeping the parentsubsidiary listing is an ambiguous situation with a dilemma as group management.
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〇 In the first place, in a parent-subsidiary listing arrangement, the Parent (controllingshareholder) bears risks and receives economic returns in proportion to its shareholding ratio
in terms of the economic aspect (rights to self-interest). On the other hand, from theperspective of management participation (common interest rights), the Parent has substantive
management control beyond its shareholding ratio. Although the minority shareholders ofsuch a subsidiary have a right to ask questions at the general meeting of shareholders, theirvoting rights are substantially invalid. The parent-subsidiary listing entails such a situation, thatshareholders are deprived of part of their rights in effect.
For example, when a company purchases shares of an existing listed company to make it asubsidiary, it can obtain substantive management control through partial acquisition (such as51%) of shares, rather than an outright acquisition. In other words, the Parent can obtain 100%control over the subsidiary with about a half of funds. On the other hand, the minority
shareholders of the acquired company are left with their voting rights substantially invalid, andthe value of their shares is discounted by the amount equivalent to the value of the voting
rights.
This is the fundamental starting point of all issues of parent-subsidiary listings.
〇 Through the parent-subsidiary relationship, the Parent may siphon profit from its subsidiaryby, for example, carrying out unfair related-party transactions or imposing trademark royalties
and management guidance fees. In addition, there may be parent-subsidiary contracts andarrangements that prescribe, for example, the permanent dispatch of a certain number of
directors from the Parent. In many cases, such contracts and arrangements are not fully
disclosed to shareholders. Moreover, there are “risks in emergency” such as the exercise ofmanagement control rights when there is a disagreement on management policies between
the Parent and the subsidiary, and the purchase of shares of the subsidiary at a discount priceto make it a wholly-owned subsidiary. The lack of transparency in such situations as describedabove, which can cause economic disadvantages to the minority shareholders of the subsidiary,
is a discount factor to corporate value.
(2) Advantages and costs in “peacetime”〇 There is no problem with parent-subsidiary listings when the management policies of boththe Parent and its subsidiary are in accord, the subsidiary receives support from the Parent,
and both achieve growth through synergy effects. We refer to this as “peacetime” in which theinterests of the Parent (controlling shareholder) coincide with the interests of the minority
shareholders of the subsidiary. If the subsidiary can take advantage of business synergy with
the Parent and receive tangible and intangible benefits of being a member of the group (e.g.,higher creditworthiness and reduction in management cost), and both the Parent and the5www.iicef.jp

subsidiary achieve growth, the minority shareholders of the subsidiary can also receive
benefits.
〇 On the other hand, the Parent must respect the independence and autonomy of the subsidiary.
In that sense the Parent would have to spend time, effort, and cost for ensuring the alignmentof management policies and introducing and supervising a group governance structure. The
subsidiary is also required to elect multiple outside directors who are independent of theParent, and to implement mechanisms to prevent conflict of interest, including the monitoringof related-party transactions with the Parent, and accounting audit to retain its earnings atappropriate levels. At the same time, the subsidiary has to properly disclose any arrangementswith the Parent.
〇 Nonetheless, this may not be a serious issue as the time, effort, and cost will be absorbed if
both the Parent and the subsidiary can benefit from their concerted promotion of strategies
in an appropriate balance between the independence of the subsidiary and group-widecoordination.
〇 However, those management costs associated with the subsidiary listing may become aburden on the group if they increase in the future as a result of changes in shareholders’awareness and regulation tightening.
(3) Issues to surface in “emergency”〇 “The subsidiary does not obey the instructions of the Parent.” “The Parent forces its view on
everything we do. The inflexible Parent makes our movement slow.” It may not cause aproblem as long as such small frictions between the Parent and the subsidiary arising fromdifferences in history, corporate culture, and management style or from the pride as a listedcompany are resolved through consultation. However, in an “emergency” in which there is adefinitive disagreement between the Parent and the subsidiary on management policies dueto changes in the business environment or for other reasons, and the disagreement cannot be
resolved through consultation, serious issues may surface. The Parent would exercise its rights
as a shareholder in accordance with its own will based on its management control, by which it
could replace directors or even the independent outside directors that it has once approvedin some cases.
〇 It is accepted if the management policies of the Parent imposed on the subsidiary are in linewith the common interests of shareholders of the subsidiary. If they prioritize the interests ofthe Parent, however, the interests of the minority shareholders of the subsidiary may beundermined.
〇 In the case that the Parent acquires 100% ownership of its subsidiary, the Parent can purchasesuch shares at a discount price by using its status as the controlling shareholder. Any change
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in the capital structure that will undermine the interests of the minority shareholders of thesubsidiary will also constitute an “emergency.”〇 The concerns of minority shareholders about such “risks in emergency” cannot be dispelled
even if the Parent insists that “we will respect the independence of the management of thesubsidiary” and “we will protect the interests of minority shareholders” because there is noway to guarantee such statements. Therefore, investors who are minority shareholders areforced to set their cost of capital at a higher level, which is a discount factor to stock price.
(4) Although “risks in emergency” cannot be eliminated, can a company explain the advantagesof the existence of minority shareholders at the subsidiary?
〇 Although these risks in emergency cannot be eliminated, the Parent can reduce them byexplaining “the advantages of the existence of minority shareholders at the subsidiary and theimportance of their interests” and disclosing sufficient information to the minority
shareholders in an emergency, and thereby convincing them of its intention to protect theirinterests.
〇 Some of the advantages of listing in terms of recruitment and trust of business partners arise
from credibility as a listed company. However, this could well be synonymous with overrelianceon the brand image of the listing on the TSE 1st Section. Such advantages can often be secured
sufficiently if a listed subsidiary becomes a wholly-owned subsidiary with a trade name bearing
the name of the Parent to take advantage of its brand and credibility. In some cases,
management levels of a subsidiary have been raised due to the existence of minority
shareholders. However, this can also be achieved by enhancing group governance by theParent. Therefore, in these cases, the advantages cannot be directly attributable to theexistence of minority shareholders.
〇 A Parent can explain the advantages for the Parent of the existence of a subsidiary within its
group (such as synergy) or the advantages for the subsidiary of the brand value as a listedcompany (such as recruitment), but it is rather difficult to put forth a reasonable andpersuasive advantage for the Parent of the existence of minority shareholders in the subsidiary.
〇 Possible examples of the latter include opportunities to listen to diverse opinions that aredifferent from those of the Parent, securing business opportunities with competitors to theParent, and the ability to introduce incentive plans that leverage the functions of the capital
market, such as stock-based compensation and stock options to the officers and employees ofthe subsidiary. (It is particularly effective in incentivizing and securing the founding members
and key employees in the case of a buyout of a venture company). These are the uniqueadvantages of listing. If the advantages of maintaining the listing of a subsidiary and its
minority shareholders are considered convincing, it might be possible to counteract the effect7

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of risks in emergency that work as a discount factor.
(5) Aim for the sharing of mutual understanding through engagement〇 We request that the board of directors of applicable Parent discuss once again and share theirunderstandings at its meetings and disclose externally not only the advantages of listing asubsidiary, which have been recognized so far, but also its disadvantages such as time, effort,
and cost required, which have not drawn much attention in the past, and above all, theadvantages of the existence of minority shareholders in the subsidiary and the Parent’sresponsibility as the controlling shareholder to respect the interests of minority shareholders.
〇 Parent-subsidiary listings should be avoided or dissolved if their advantages are unclear, there
are disadvantages to the minority shareholders of the subsidiary, or such risks have a potential
to surface in the future. We request that if a Parent clearly recognizes advantages ofmaintaining listing of its subsidiary or the existence of minority shareholders and intends tomaintain parent-subsidiary listings, it should provide a sufficiently convincing explanation of
their significance and advantages to shareholders.
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Based on the recognition of the issues outlined above, IICEF will continue to hold collectiveengagement meetings with companies on these points, and strive to share the understanding of theissues to resolve them.

Contact information:
Institutional Investors Collective Engagement Forum
Directors in charge: Yuki Kimura, Chairman; Naomi Yamazaki, Administration Manager; Ryusuke Ohori,
Executive Director; and Hiromitsu Kamata, Executive Director.
Address: Tokyo Entre Salon, Shinmaki-chou Building Annex 1, 3-2-14, Nihonbashi, Chuo-ku,
Tokyo 103-0027 JAPANE-mail: info@iicef.jp

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