Agenda Item 4: Elect Mr. Yoshiaki Ikei as a director
Reasons for Proposal
Three out of the five internal directors of the Company are members from the founding family. The founding family members collectively hold nearly 30% of the Company’s shares. The family has taken over the Company’s most important positions, such as the chief Komon (Saiko-komon), Kaicho, president and vice president. This makes it clear that the family holds strong influence over the Company. The protection of minority shareholders’ interests is particularly important under such a control structure. Despite these circumstances, the Company has failed to introduce all but a vanishingly small number of the voluntary mechanisms that the Corporate Governance Code recommends be introduced to protect minority shareholders, such as a Nomination and Compensation Committee.1
Directors have a critical role in managing potential conflicts of interest between the founding family and the shareholders of the Company. This role is of growing importance as the momentum for consolidation in the Company’s industry builds, since such conflicts will arise as the Company considers strategic options like mergers. Ms. Inoue is the only one of the Company’s three independent directors with experience in management. This leaves the Board of Directors with highly inadequate experience to advise and oversee the Company’s business execution. Oasis believes that we can expect the enhancement of corporate value by adding a highly independent outside director with M&A experience to the Board of Directors.
1: Tokyo Stock Exchange Inc., Corporate Governance Code (2021/06/11) (the “Corporate Governance Code”) Principles 4-10.
Reason for Nomination as a Director Candidate
Mr. Ikei has been involved in the M&A industry for many years. He participated in the founding of RECOF Co., Ltd., the first M&A specialist company in Japan, from 1990. He has a wealth of experience in, and knowledge of, M&A, as well as extensive experience and broad insight as a corporate manager.
Today’s drugstore industry is increasingly dominated by the biggest players and becoming oligopolistic. With growing momentum for market consolidation, it is of critical importance to capture opportunities to increase corporate value through M&A. We can expect that Mr. Ikei will provide the Company’s management with necessary advice and recommendations as an M&A industry expert. Additionally, Mr. Ikei has extensive practical experience in supervising management as an outside director; he serves on the Nomination and Compensation Advisory Committee and the Investment Committee of Japan Lifeline Co., Ltd., a listed company. We can expect that Mr. Ikei will advise the Company’s Board of Directors and supervise its business execution appropriately based on such expertise and knowledge.
For the above reasons, Oasis proposes the election of Mr. Ikei as an outside director.
Agenda Item 5: Amendment of the Articles of Incorporation (Election of a Lead Independent Outside Director
Summary of the Agenda Item
The following articles shall be added to the current Articles of Incorporation, and Article 23 and subsequent articles shall be renumbered by two clauses each. If it is necessary to make formalistic adjustments (including, but not limited to, the correction of a deviation in article numbers) to the text of this proposal due to the adoption of another proposal (including Company proposals) at this AGM, the text of this Proposal shall be replaced with the text after the necessary adjustments.
(Independent Outside Director(s) and Lead Independent Outside Director)
Article 23 - The Company shall elect outside directors that are independent under the independence standards of the Tokyo Stock Exchange (the “Independent Outside Director(s)”).
2. If more than one Independent Outside Director is elected, a Lead Independent Outside Director shall be elected by a vote amongst the Independent Outside Directors.
(Duties of the Lead Independent Outside Director)
Article 24 - The Lead Independent Outside Director shall lead the Independent Outside Directors and shall perform the following duties.
(1) Lead discussion and sharing of understanding among Independent Outside Directors.
(2) Act as an intermediary for communication between Independent Outside Directors and the Company’s internal directors and management.
(3) Lead coordination between Independent Outside Directors, corporate auditors, and the board of corporate auditors.
(4) Lead dialogue with shareholders.
(5) Implement the communication, coordination and development of appropriate systems required to perform the duties set forth in the four preceding items.
Reasons for Proposal
Oasis has on multiple occasions requested to meet with the Company’s representative director, the director in charge of investor relations, and other directors in order to engage in constructive dialogue with management as a shareholder on the topic of how the Company is managed. However, the Company has refused all such requests. Only after Oasis took action to directly contact outside directors was a meeting arranged with the director in charge of investor relations. Still, no meeting was arranged with the outside directors. The Company insisted that, in principle, the representative director and the director in charge of investor relations do not participate in direct dialogue with investors, and they do not receive any direct feedback from investors. As such, the Company’s system for dialogue between shareholders and directors is inadequate. The Company’s attitude towards shareholder dialogue and refusal to engage with shareholders clearly violates the Corporate Governance Code and the Guidelines for Outside Directors.2 This is a serious issue that may erode the Company’s opportunities to enhance corporate value through such dialogue. For the above reasons, Oasis proposes to select a Lead Independent Outside Director who will play a leading role in dialogue with the Company’s shareholders.
2 The Ministry of Economy, Trade and Industry Practical Guidelines on the Role of Outside Directors (Guidelines for Outside Directors) (July 31, 2020) Chapter II-6 Engagement in Dialogue with Investors and Investor Relations etc.
Agenda Item 6: Amendment of the Articles of Incorporation (Establishment of a Nomination and Compensation Committee)
Summary of the Agenda Item
The following chapter shall be newly created to the current Articles of Incorporation. “Chapter VII Accounting” in the current Articles of Incorporation shall be changed to “Chapter VIII Accounting” and Article 42 and subsequent articles shall be renumbered by six clauses each. If it is necessary to make formalistic adjustments (including, but not limited to, the correction of a deviation in article numbers) to the text of this proposal due to the adoption of another proposal (including Company proposals) at this AGM, the text of this proposal shall be replaced with the text after the necessary adjustments.
Chapter VII: Nomination and Compensation Committee
(Establishment of a Nomination and Compensation Committee)
Article 42 - A Nomination and Compensation Committee shall be established as an advisory body to the Board of Directors.
(Composition of the Nomination and Compensation Committee)
Article 43 - The Nomination and Compensation Committee shall consist solely of directors, and a majority of its members must be outside directors.
2. One outside director who is a member of the Nomination and Compensation Committee shall be elected chairperson by a vote amongst the members of the Nomination and Compensation Committee.
3. Those internal directors who hold 5% or more of the Company’s shares or 5% or more of all of the Company’s voting rights cannot serve as members of the Nomination and Compensation Committee.
4. The Company’s shares or voting rights owned by persons specified in the following items in their own name or in another person’s name shall be deemed to be owned by internal directors.
(1) Relatives within the third degree of kinship of an internal director.
(2) A legal entity or any other similar organization (the “Legal Entity(ies)”), in which the internal director or a relative within the third degree of kinship with the internal director owns more than 50% of the shares, investment units, or similar equity or voting rights of the Legal Entity, in their name or another person’s name.
(3) Legal Entities where the internal director or a relative within the third degree of kinship of the internal director has the right to represent such Legal Entity.
(Selection of Members of the Nomination and Compensation Committee)
Article 44 - The members of the Nomination and Compensation Committee are appointed by resolution of the Board of Directors to be held after the conclusion of the Annual General Meeting of Shareholders. However, in the event that such members retire or as otherwise necessary, such members may be appointed by resolution of an Extraordinary Board of Directors meeting.
(Term of Office of the Members of the Nomination and Compensation Committee)
Article 45 - The term of office of members of the Nomination and Compensation Committee shall expire at the conclusion of the last Annual General Meeting of Shareholders for the business year ending within one year after their election.
(Matters for Consultation with the Nomination and Compensation Committee)
Article 46 - The Nomination and Compensation Committee shall deliberate on the following matters in consultation with the Board of Directors. The Board of Directors shall respect the opinions of the Nomination and Compensation Committee when it makes its decisions on these matters.
(1) Draft proposals for election or removal of directors to be submitted to the Annual General Meeting of Shareholders.
(2) Draft proposals for election, removal, and division of duties of the representative director and executive directors to be submitted to the Board of Directors.
(3) Policies for selection of directors.
(4) Other matters related to appointment and removal of directors.
(5) Proposals concerning the compensation of directors to be submitted to the Annual General Meeting of Shareholders.
(6) Specific amounts of compensation to be paid to each director (including remuneration as an employee for those directors who concurrently serve as employees of the Company).
(7) Matters concerning the issuance and allotment of stock options to shares, shares or corporate bonds with or without compensation (regardless of whether it is referred to as remuneration and regardless of whether it is a nominal or favorable issuance) to directors and their relatives within the third degree of kinship, and legal entities or other similar organizations in which these persons hold more than 50% of shares, investment units, or similar interests or voting rights in their own or another person’s name.
(8) Other matters related to director compensation.
(Nomination and Compensation Committee Rules)
Article 47 - Other matters relating to the Nomination and the Compensation Committee shall be governed by law or the Articles of Incorporation, as well as by Nomination and Compensation Committee Rules provided by the Nomination and Compensation Committee.
Reasons for Proposal
The Company does not disclose its policies and procedures, such as skill matrices, for the election of directors.3 Further, the Board of Directors’ ability to effectively select and dismiss senior management and directors in a fair and highly transparent manner in accordance with the Corporate Governance Code is questionable, given the strong influence exerted by founding family directors who are also significant shareholders.4 The current board’s procedures raise various concerns as to their ability to manage conflicts of interest between the common interests of shareholders and the interests of the founding family. For example, the Company issued stock options at a price that they alleged to be nominally fair to the founding family without shareholder approval. However, this share issuance is suspected to represent a form of compensation for those founding family directors. The Company has a strong need for supervision of the procedures by which nomination and remuneration, including issuance of shares and stock options, is determined, from a position independent of the founding family. A Nomination and Compensation Committee with an outside director majority should be established to strengthen5 the independence, objectivity, and accountability of the procedures for nominating directors and determining their compensation.
3 Explanation regarding Supplementary Principles 4.10.1 and 4.11.1, as set out in the Company’s Corporate Governance Report.
4 Corporate Governance Code Supplementary Principle 4-3(1)
5 Corporate Governance Code Supplementary Principle 4-10-(1)
Agenda Item 7: Determination of Individual Fixed Compensation Amounts for Outside Directors
Summary of the Agenda Item
The amount of fixed compensation for each outside director shall be JPY 10 million per person per fiscal year.
Reasons for Proposal
The Company needs to appoint experienced and capable individuals as outside directors to properly supervise the Company’s business execution and to enhance corporate value, given the strong influence exerted by founding family directors who are significant shareholders. Outside directors must be paid fair compensation commensurate with their roles to accomplish this. However, the Company’s outside director compensation is limited to a total of JPY 14 million for four outside directors. This is out of a total compensation amount of JPY 121 million for all directors in the 24th fiscal year, and JPY 6 million for two outside directors out of a total compensation of JPY 146 million for all directors in the 23rd fiscal year. It is difficult to secure excellent candidates with such low compensation.
Further, the upper limit for compensation should be set individually for each director, rather than the current approach of setting an aggregate upper limit for compensation to be shared amongst all directors. This change is required to attract truly capable and independent director candidates with predictable compensation. Therefore, Oasis proposes a fixed compensation amount of JPY 10 million per year for each outside director.
Agenda Item 8: Determination of Restricted Stock Compensation Amounts for Each Individual Outside Director
Summary of the Agenda Item
At the Extraordinary General Meeting of Shareholders held on June 28, 2016, Shareholders approved providing up to JPY 300 million per year (excluding remuneration as an employee when a director concurrently serves as an employee of the Company) in director compensation. In addition, individual outside directors shall be granted JPY 3 million per year in monetary compensation claims for the allotment of restricted shares, with a transfer restriction period of three years from the time of the grant. These grants are to provide incentives to the Company’s outside directors for the sustainable enhancement of corporate value and to further promote the sharing of value between the outside directors and shareholders. The specific timing and distribution of such restricted stock compensation is to be determined by the Board of Directors.
Reasons for Proposal
By providing stock-based compensation to outside directors, compensation is linked to fluctuations in share price, creating an incentive to supervise the Board of Directors to take measures to steadily improve the share price. In addition, the majority of the Company’s Board of Directors are internal directors from the founding family who hold a significant number of shares, meaning that the founding family’s strong influence over the Board of Directors creates structural problems that could harm the interests of ordinary shareholders. The introduction of stock-based compensation puts the outside directors themselves in the position of minority shareholders, such that they can be better expected to fairly represent the interests of ordinary shareholders. For the above reasons, Oasis proposes to introduce a restricted stock-based compensation plan for outside directors.