Parent-subsidiary listings, in which a parent company and its subsidiary are separately listed, are disappearing in Japan. The number of such companies fell about 20% in a year as the government stepped up pressure to improve corporate governance transparency, including stricter requirements on outside directors.
Japan's Nihon Keizai Shimbun reported on the 21st, citing a survey by the Nomura Institute of Capital Markets Research, that the number of listed subsidiaries stood at 139, down about 20% from a year earlier. That is one-third of the peak of 417 companies recorded as of March 2007.
The trend reflects two policy shifts since the 2000s. As Japan overhauled its listing rules through the 2000s and 2010s, the Tokyo Stock Exchange said in 2007 that listing a subsidiary alongside its parent was "difficult to conclude as a desirable capital policy." The exchange pointed to the risk of conflicts of interest, noting that a parent company could use its dominant position to interfere excessively in a subsidiary's management or maximize its own profit at the subsidiary's expense. Overseas investors also flagged parent-subsidiary listings as a problem. U.S.-based Perry Capital bought a large stake in NEC's semiconductor subsidiary and in 2007 demanded that NEC unwind the parent-subsidiary listing.
Global companies in Japan moved first. Hitachi, one of the country's leading electronics, heavy machinery and energy groups, began absorbing five companies including Hitachi Information Systems as wholly owned subsidiaries through tender offers in 2009. In 2011, Toyota Motor took the same steps with key affiliates Kanto Auto Works and Toyota Auto Body.
The second shift was the 2021 revision of the corporate governance code by Japan's Financial Services Agency and the Tokyo Stock Exchange. A range of guidelines on management transparency were introduced at the time. Listed subsidiaries were required to fill at least one-third of their boards with "independent outside directors," while companies on the Prime Market, the top tier of Japan's stock market, were required to make a majority of their boards independent outside directors. The requirements also included setting up a special committee to review potential conflicts of interest between the parent company and minority shareholders.
The "independent outside director" standard proved to be the sticking point. Outside directors dispatched from a parent company to a subsidiary did not meet the standard. Recruiting from outside was difficult because of the challenge of finding candidates, and the burden of setting up a special committee added to the strain, leaving more executives skeptical about keeping subsidiaries listed. Activist investors have also kept up pressure on parent-subsidiary listings. Japanese activist fund Strategic Capital demanded at Osaka Steel's shareholder meeting in June that the company buy back all of its shares held by parent Nippon Steel. The proposal was not approved but won 63% support.
Korean financial authorities are also tightening rules on parent-subsidiary listings. But while Japan is pursuing an indirect approach — disclosing shareholder votes to increase pressure from public opinion rather than imposing direct restrictions — the Korea Exchange has moved to ban the practice outright by introducing rules and guidelines based on a principle of prohibiting parent-subsidiary listings with limited exceptions. Under the exchange's proposed revisions to its listing and disclosure rules, a parent company seeking to list a spun-off subsidiary alongside itself must obtain the consent of minority shareholders under the so-called 3% rule, which caps voting rights at 3% for shareholders holding more than that share.
The number of listed subsidiaries is expected to fall further after the Tokyo Stock Exchange makes it mandatory, starting with shareholder meetings held from 2027, to disclose the share of minority shareholders voting for and against director appointments. Previously, companies only had to present the overall shareholder vote for each director, prompting criticism that it was impossible to tell whether a parent company's voting had swayed the outcome. Nikkei said more subsidiaries could delist to avoid revealing low support from minority shareholders.
