RMB Capital Explains Shareholder Proposals at Faith Inc. Regarding a Dividend Increase and Outside Director
RMB Capital ("RMB") filed shareholder proposals regarding a dividend increase and outside board director for the 27th annual general shareholders' meeting at Faith Inc. (4295 JP), which is scheduled to take place in June 2019. RMB explains the background and rationale for its proposals below.
RMB's analysis
RMB identifies the following factors that have been driving down the share prices of Faith:
- Faith's capital structure policy is not rational, and its excess cash is not deployed appropriately.
- The effectiveness of its corporate governance system is in doubt.
RMB has been engaging with the management of Faith and has discussed the following solutions in the past:
- Revisiting its capital structure policy and enhancing shareholder return, including through a dividend increase
- Accepting an RMB-recommended outside director to improve Faith's corporate governance
Accordingly, RMB filed shareholder proposals on increasing dividends and appointing an outside board member to help fulfill these recommended solutions.
Details of RMB's proposals
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Proposed dividend increase of 380 yen per share (a total of
approximately 5 billion yen)
Faith made Nippon Columbia a 100% subsidiary through a stock swap deal in August of 2017. We estimate Faith should have paid approximately 5 billion yen of cash to Nippon Columbia's shareholders if the deal had been a cash tender. During the acquisition, Faith's management explained they wanted the shareholders of Nippon Columbia to stay on as Faith's shareholders and enjoy an improvement of corporate value at the post-merger Faith, all while management implemented business expansions including further acquisitions using this saved cash. Two years have passed, and Faith management has not implemented any business expansion plans while leaving the cash unused. As a result, no increase of the corporate value was achieved, and shareholders saw Faith's share prices decline by as much as 30% since the merger announcement, given the lower capital efficiency at the firm.
RMB thinks the management should return the entire 5 billion yen of cash that was saved in the stock swap acquisition of Nippon Columbia to the shareholders, since management did not follow through on its promise made two years ago. -
Appointment of an outside board member
Appointing an outside director who is truly independent from the management is crucial to secure the effectiveness of the corporate governance. RMB's proposed candidate, Mr. Masakazu Hosomizu (partner and portfolio manager at RMB) has been delivering opinions and proposals to Faith's management as a minority shareholder and is qualified as a truly independent outside director. The above candidate received 19.3% of the approval vote during the 26th annual general shareholders' meeting last year, with support from other minority shareholders including both domestic and overseas institutional shareholders. The nomination and compensation committee, which was formed in December, should respect the minority shareholders' opinion and follow appropriate nomination processes, including an interview with the candidate.
About RMB Capital
Headquartered in Chicago, RMB Capital is an independent investment and advisory firm that serves high-net-worth individuals and families as well as institutional investors. Its businesses include wealth management, family office services, asset management, and retirement plan consulting. Its asset management business specializes in long-term, concentrated, active investing strategies with coverage that spans the market-cap spectrum and the globe. To learn more about RMB, visit www.rmbcap.com.
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