Proxy Voting Policy

On the surface, the company continued to perform well thanks to the contribution of earnings from equity method affiliates and gains from the sale of shares. However, this obscured the governance challenges the company faced. Considering the doubts surrounding the sustainability of its strong performance, we believed there was an urgent need to strengthen its governance system, including the effectiveness of the board of directors and nominating and compensation committees, as well as its approach to information disclosure.

In our engagement with the company, we discussed the structure of the director's remuneration system, the status of nominating and compensation committee meetings, and the method of information disclosure in the event of misconduct. We also communicated our expectations as shareholders and investors regarding the next medium-term management plan, which was being formulated at the time. Further, we pointed out issues with the company's information disclosure and urged improvements.

The new medium-term management plan was announced at the financial results meeting, but its contents diverged significantly from the expectations of investors, and the company's stock price plummeted after the announcement. Further, there were no particular improvements in governance-related matters or the company's approach to information disclosure. While these matters did not formally violate Daiwa AM's Proxy Voting Policy, we determined that there were issues with the governance system and made the decision to oppose the proposal for the reappointment of the company's top management (president and representative director).

Over the past few years, the company's performance had been sluggish, and its ROE was on a downward trend. The company had been slow to select and concentrate its businesses, leading to an expansion of its business areas and resulting in the accumulation of numerous non-core businesses. A high-cost structure that reduced competitiveness and profitability was a further factor in its poor performance. In addition, the company's large amount of cross-shareholdings and extremely safety-focused financial strategy resulted in a large buildup of equity capital, which also contributed to the decline in its ROE.

Daiwa AM shared its perception of the above issues with the company and first discussed the cost of capital, confirming a shared understanding of the level of the company's cost of capital. Next, we requested that the target ROE level be clearly defined. We also conveyed our view that improving profitability required the company to review its business portfolio and that breaking away from its high-cost structure was an urgent priority. Furthermore, we pointed out that balance sheet reforms, including regarding cross-shareholdings, were also crucial for improving ROE. In response, the company requested specific details on what initiatives and disclosures could serve as decision-making factors for proxy voting. Daiwa AM expressed the view that it was necessary to explicitly present a bold reduction policy for cross-shareholdings, aiming to reduce them to less than 20% of net assets. Regarding ROE, we stated that it was essential to set a concrete target exceeding the cost of capital and to disclose specific measures to improve ROE that would satisfy investors, such as business portfolio reforms and cost reductions. Initially, the company was philosophically opposed to personnel reductions and noted that its cross-shareholdings were in companies it had been involved with since its founding and to which it held strong emotional ties. However, by emphasizing the necessity for swift action based on the company's current situation, we gained the company's understanding.

At financial results briefings and elsewhere, the company clearly stated its target ROE level. The company also announced cost-cutting measures, such as a policy to review its business portfolio, including withdrawing from non-core businesses; and controlling personnel expenses by reducing hiring. Further, regarding cross-shareholdings, the company presented a concrete reduction plan that included long-term targets, and announced substantial sales of cross-shareholdings thereafter.

Although the balance of cross-shareholdings retained by the company remained large, we determined that it was indeed making efforts to reduce such holdings, and assessed that they were not in conflict with our Proxy Voting Policy. Although the company's performance fell short of our criteria, we confirmed through engagement that management had initiated structural reforms, including a review of the business portfolio and cost-cutting measures. We therefore made the decision to withhold the application of the relevant criteria and to vote in favor of the reappointment of the company's directors.