Japan exchange has a problem with its landlord
02/06/2021 03:45
(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Jennifer Hughes
HONG KONG, June 2 (Reuters Breakingviews) - Friendships that
deepen the longer they go on can enrich peoples’ lives. The
equivalent between companies risks the opposite. Heiwa Real
Estate’s 8803.T close boardroom and financial ties with its
top tenant and forebear, $12 billion Japan Exchange Group
8697.T , have been highlighted by a hedge fund. Given JPX’s
role in years of government-led efforts to improve governance,
it’s embarrassing it took an activist to point out issues with
its landlord.
Seven decade-old Heiwa not only still owns the stock
exchange buildings it was created to manage, it tends to be
helmed by former Tokyo Stock Exchange leaders and it owns a tiny
$57 million stake in TSE parent JPX. Hong Kong-based LIM
Advisors wants to end these practices. Its proposals for Heiwa’s
annual general meeting this month – opposed by the board - are
to sell the shares; ensure most executive directors have a
decade of real estate experience; and create a five-year
firebreak between JPX work and joining Heiwa’s top ranks.
Financially, the shareholding tie does not seem worth it.
Holding JPX stock for five years has generated a total return of
100%, less than half its own over the same period, per Refinitiv
data. The value of the stake equates to almost a full year’s net
profit for Heiwa. And there are questions over the rent Heiwa
charges the bourse, too. Its four stock exchange buildings total
a fifth of its leasing space but just 15% of its leasing
revenue. While a discount for an anchor tenant is reasonable,
TSE’s rent is nearly a third below market rates, estimates LIM.
The close boardroom ties make inefficient finances harder to
accept. In the last 15 years, each of Heiwa’s last three
presidents were previously senior executives at the TSE, part of
JPX since 2013. Four of the nine current directors listed on its
website have a TSE pedigree including current president Kiyoyuki
Tsuchimoto. Just two directors rose through the company’s own
ranks. Top property talent is hardly likely to join a firm it
has a slim chance to run.
JPX is currently overhauling the country’s benchmark indices
with the aim of a prime tier next year where inclusion is based
on higher governance standards. That’s a good use of its power.
Another good use would be to wield its influence in Heiwa to
lift its practices too. Good oversight starts closer to home.
Full view will be published shortly.
Follow @JennHughes13 https://twitter.com/JennHughes13 on
Twitter
CONTEXT NEWS
- Shareholders in Heiwa Real Estate are set this month to
vote on proposals that would, among other items, block officials
from $13 billion Japan Exchange Group becoming directors of the
property group within a five year period of leaving the bourse
operator.
- The proposals, opposed by Heiwa’s board, come from Hong
Kong-based hedge fund LIM Advisors, which has questioned the
governance of $1.5 billion company, which was created in 1947 by
Japan’s various exchanges to manage their property.
- LIM Advisors’ other proposals include forcing Heiwa to
sell its $57 million in JPX shares and ensuring at least two
thirds of its internal directors have a decade of real estate
experience prior to appointment.
- For previous columns by the author, Reuters customers can
click on HUGHES/
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Heiwa board statement against the proposals https://contents.xj-storage.jp/xcontents/88030/f9bd0af4/8bca/4c1b/a92d/d36e73609942/20210514170309940s.pdf
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| Editing by Una Galani and Katrina Hamlin)
((jennifer.hughes@thomsonreuters.com; Reuters Messaging:
jennifer.hughes.thomsonreuters.com@reuters.net))