September 9, 2020Engagement Agenda “Policy Concerning Cross-Shareholdings”
Investors’ Common Views and Request for Engagement Meetings on Policy
Concerning Cross-Shareholdings

The Institutional Investors Collective Engagement Forum (hereinafter referred to as “IICEF”)
together with the seven companies participating in the Collective Engagement Program, namely The
Dai-ichi Life Insurance Company, Limited, Meiji Yasuda Asset Management Company Ltd., Mitsubishi
UFJ Trust and Banking Corporation, Pension Fund Association, Resona Asset Management Co., Ltd.,
Sumitomo Mitsui DS Asset Management Company, Limited, and Sumitomo Mitsui Trust AssetManagement Co., Ltd. (in alphabetical order) has sent letters requesting collective engagement
meetings with companies holding cross-shareholdings.
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1. Overview of the Agenda
In conjunction with the revision of Japan’s Corporate Governance Code in 2018 (hereinafterreferred to as “CG Code”), companies, pursuant to Principle 1.4, are now required to disclose
their policies on and approaches to the reduction of cross-shareholdings, to specifically examine
each individual cross-shareholding, to assess whether or not each shareholding is appropriate,
and to disclose the results of such assessment. Additionally, Supplementary Principle 1.4.1
articulates that when cross-shareholders indicate their intention to sell their shares, companies
should not hinder the sale of cross-held shares by, for instance, implying a possible reduction ofbusiness transactions; and Supplementary Principle 1.4.2 articulates that companies should notengage in transactions which may harm the interests of the companies or the common interestsof their shareholders by, for instance, continuing the transactions without carefully examining
the underlying economic rationale. Furthermore, in 2019, the Cabinet Office Ordinance wasrevised to encourage the improvement of the disclosures of cross-shareholdings in the annual
securities reports.
While many companies have declared compliance with Principle 1.4 (Cross-Shareholdings) inthe “Corporate Governance Report” (hereinafter referred to as the “CG Report”), updated basedon the revisions to Japan’s Corporate Governance Code, we have come across cases of1

disclosures in which the purpose of holding remains general and abstract or no concrete
reduction policy is provided in the description. Consequently, IICEF, from 2019, has been holding
collective engagement meetings to understand actual situations of cross-shareholdings withseveral leading companies in Japan.
Based on the actual situations of these initiatives by the Japanese companies to improve thedisclosures on cross-shareholdings and to reduce cross-shareholdings, we have once again
decided to send letters requesting collective engagement meetings to the CEOs and outside
directors of major companies that hold a substantial amount of cross-shareholdings as well ascompanies whose shares are held by a large number of companies in cross-shareholdings to
discuss their views on cross-shareholdings.
2. Questions to be asked at the collective engagement meetings
As mentioned above, disclosure rules on cross-shareholdings have been strengthened throughthe revisions of the CG Code and the Cabinet Office Ordinance and most companies havedeclared their compliance with these rules.
However, despite their declaration of compliance, the disclosures pursuant to Principle 1.4(Cross-Shareholdings) in the CG Reports of most companies are limited to statements of policies
indicating their intention of cross-shareholding in order to maintain and strengthen business
relationships and do not include specific policies on reducing them. Additionally, while notrequired by the disclosure rules of CG Reports, there are no mentions of policies relating toSupplementary Principles 1.4.1 and 1.4.2 Statements on the reason for cross-shareholdings in
the annual securities reports are also limited to general descriptions and do not touch upon
specific initiatives and their effects toward enhancing corporate value.
Therefore, we would like to ask top management and outside directors who are expected toappropriately reflect the opinions of the stakeholders commencing with minority shareholders at
the Board from an independent standpoint, the following questions in order to hear their viewson the type of discussions held at Board meetings in response to the CG Code and the type ofpolicy upheld by the company regarding cross-shareholdings, among others.
(i) Whether a concrete reduction policy is set up or not, and the scale of and the process forthe reduction.
(ii) How the company is reacting with the policy in the event that the counterparty in thecross-shareholding indicates its intention to sell the shares it holds. If the company is in2

compliance with “companies should not hinder the sale of the cross-held shares” ofSupplementary Principle 1.4.1 of the CG Code, then how it is enforced on the employees toensure that sales are not hindered. What you think of IICEF’s opinion of stating the company
policy in the CG Report and clearly indicating the stance to the cross-shareholders and business
partners.
(iii) What the details of analyses of the individual cross-shareholdings are. Whether asimulation has been conducted on the impact on business activities and results in the eventthat cross-held shares are sold. If the disposal of shares is found to impact business activities, it
indicates that the counterparty has practically decided not to comply with Supplementary
Principle 1.4.1 of the CG Code. What your thoughts on the counterparty’s non-compliance are.
(iv) Thoughts on the various concerns held by investors regarding cross-shareholdings (describedin “3. Investors’ approach to cross-shareholdings”).
(v) Why cross-shareholdings are thought to be linked to maintaining and strengthening business
relationships.
(vi) Thoughts on building stable (loyal) shareholder-base through mutual holding of shares.

3. Investors’ thoughts on cross-shareholdings
Cross-shareholdings are a type of shareholding unique to Japan. The mutual holding of shares,in particular, began in post-war Japan as a way for companies to protect themselves from cornering
or from the entry of foreign capital as a result of capital liberalization. Some view this practice
played an integral part in the reinforcement of stable management from a long-term perspectiveby mutually becoming stable shareholders with amicable companies and business partners, bylimiting shareholder interference in management from a short-term perspective. Thesecircumstances have led to Japan’s unique two-fold relationship between cooperative business andcapital relationships. This practice of increasing the volume of information with business partners,
sharing risks, and reducing transaction costs, while at the same time acquiring cooperative
shareholders who do not interfere in management is said to have promoted Japanese-style
management carried out by internally-promoted corporate managers (the so-called EmployeeSovereignty principle).
Cooperative relationships that accompany capital contributions such as capital alliances andjoint ventures also exist overseas. Investors are receptive to a certain extent to shareholdings thatentail cooperation such as business transactions and joint developments, which have been
demarcated by a detailed agreement. However, they are negative on thinking of utilizing
management participation rights and the pressure of stock disposal to continue transactions otherthan to take control or as a capital alliance or joint venture. Most important of all, investors are3

opposed to the concept of a company forcing another company to hold its shares to become astable shareholder in exchange for business relationships. Investors believe that companies should
get out of these concepts and systems of old-fashioned Japanese-style management.
Cross-shareholdings have given rise to various concerns and risks with the passage of time andthe changes in the business environment, including the possibility that cross-shareholdings “couldlead to a lack of management discipline” and “are desterilized risk assets on company balance
sheets causing inefficiency in capital management,” as pointed out by the Council of Experts
Concerning the Follow-up of Japan's Stewardship Code and Japan's Corporate Governance Codeof the Financial Services Agency.
While many companies state the continuance and strengthening of business relationships as thereason for cross-shareholdings, we believe that the continuance and strengthening of business
relationships and holding of shares should be recognized separately. In cooperative relationships
such as business relationships and joint projects, the actions of both counterparties arecontractually defined. Providing superior products and services at a reasonable price andcontinuing to engage in contractual transactions in good faith leads to good business relationships
and a mutual relationship of trust, and the concept that the mutual holding of shares is a sign ofsuch amicable relationships is untenable. In today’s world of expanding global supply chains, theconcept of cross-shareholdings can no longer be justified to overseas business partners. On thecontrary, the Japanese market practice of making cross-shareholdings “a prerequisite of stableongoing business relationships” appears to overseas parties as a sign of a closed market.
Maintaining and strengthening business relationships as a reason for cross-shareholdings also
represent a skeptical legal argument. If business transactions were being conducted on theassumption of holding shares, it would raise concerns of “profit-giving to specific shareholders”
and would, in turn, be a breach of the “Principle of Shareholder Equality” in the Companies Act ofJapan, Moreover, if the holding of shares had been forced on the business partner, it raises
concerns that the party forcing the shareholding is “Abuse of a Superior Bargaining Position” underthe Antimonopoly Act. At the same time, the possibility of conflict between the benefits of thebusiness partners and the benefits of the shareholders has been pointed out. Therefore, when
examining “whether the benefits and risks from each holding cover the company’s cost of capital,”in accordance with CG Code Principle 1.4, and when such benefits include monetary benefits suchas revenue and income, the company could, in effect, be admitting to the profit-giving or theconflicts of interest described above.
Furthermore, the concept of “justifying cross-shareholdings because the returns from theshares exceed cost of capital” implies that the company is allocating capital to the non-core4business of equity investments rather than investments for growth of the company’s core businessor returns to shareholders, and from a capital efficiency perspective, it means that the company
is not maximizing its business value. This could result in the discounting of the company’s shareprice and the deterioration of its future financing capabilities. Another disadvantage of crossshareholdings is that it ties up funds, which otherwise could have been effectively utilized asworking capital. These are the concerns that have been raised from a financial perspective.
Furthermore, the concerns of companies whose shares are being held (or who have forced theholding of their shares) include concerns relating to business strategy. A business partner holding
a company’s shares in a cross-shareholding may be a vital business partner now but there is noguarantee that it will remain so into the future. In today’s “discontinuous age” of drastic changes
in the business environment, fundamental changes to the supply chain is always a possibility. In
the event that an important business partner must be replaced, the existence of the cross-heldshares may make the change difficult and may give rise to discrepancies in the execution ofbusiness strategies. In certain instances, the party concerned may become a powerful dissenting
shareholder against current management.
Finally, cross-shareholding may raise concerns which the investors fear the most, i.e. concerns
over governance and ethics. Investors fear that because of the “stable shareholder policy” which
unconditionally supports management, management will no longer feel the constraints to honor
the mandate given by the shareholders, resulting in lax business management. “Stability ofmanagement” is essentially made possible by ensuring accountability to shareholders andreinforcing the legitimacy of management, and not by excluding shareholders who do not alignwith management.
Furthermore, a stable shareholder policy may also give employees misrecognition of governanceand may lead to inefficient business activities. The pursuit of a stable shareholder policy bymanagement may result in employees deciding “to place orders with business partners who arestable shareholders, despite the poor quality because they are like family,” or “to reducetransactions with business partners who have sold the company’s shares” and promote inefficientbusiness practices, as well as foster a misguided set of values where “there is nothing wrong withgiving benefits to shareholders who make up the ‘ruling party.’”
In light of the above, we ask that companies that consider cross-shareholdings a necessity todepart from the concept of “stability of management” based on cross-shareholdings and steer
management toward “stability of management” based on strong support from the investors.

5Contact information:
Institutional Investors Collective Engagement Forum
Directors in charge: Yuki Kimura, Naomi Yamazaki and Ryusuke Ohori
Address: Tokyo Entre Salon, Shinmaki-chou Building Annex 1, 3-2-14, Nihonbashi, Chuo-ku,
Tokyo 103-0027 JAPANE-mail: info@iicef.jp*Japan’s Corporate Governance Code (excerpt)
Principle 1.4 Cross-Shareholdings
When companies hold shares of other listed companies as cross-shareholdings, they should
disclose their policy with respect to doing so, including their policies regarding the reductionof cross-shareholdings. In addition, the board should annually assess whether or not to holdeach individual cross-shareholding, specifically examining whether the purpose is appropriate
and whether the benefits and risks from each holding cover the company’s cost of capital.
The results of this assessment should be disclosed.
Companies should establish and disclose specific standards with respect to the voting
rights as to their cross-shareholdings, and vote in accordance with the standards
Supplementary Principles
1.4.1

When cross-shareholders (i.e., shareholders who hold a company’s shares for the purposeof cross-shareholding) indicate their intention to sell their shares, companies should nothinder the sale of the cross-held shares by, for instance, implying a possible reduction ofbusiness transactions.

1.4.2 Companies should not engage in transactions with cross-shareholders which may harm theinterests of the companies or the common interests of their shareholders by, for instance,
continuing the transactions without carefully examining the underlying economic rationale.

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