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Sekisui House 5.5 billion yen land fraud – Outcome of the conflict between the new and old chairmen

June 15, 2020

Asahi Shimbun

Shiro Matsuda / Daisuke Ikuta


A shareholder proposal by former Chairman Wada seeking to elect 11 directors was made at Sekisui House's general meeting of shareholders held in April this year.  Mr. Wada and others sought to improve corporate governance and reform the Company’s management team over a fraud case where Sekisui House was defrauded of about 5.5 billion yen in a transaction of land in Tokyo. The truth of the incident remains a mystery.  Why did Mr. Wada and others make the shareholder proposal?


Sekisui House AGM Venue = April 23, 2020, Kita-ku, Osaka

In a meeting room on the 35th floor of a skyscraper with a panoramic view of Osaka city, the shareholders meeting of Sekisui House started on the morning of April 23 this year.


"I propose to dismiss the chairperson of this shareholders’ meeting!"


Forty minutes after the meeting started, one of the shareholders sitting in the front row raised his hand and made the motion.  Some shareholders were distrustful of the chairperson of the meeting of shareholders Toshinori Abe – due to his attitude of limiting the number of questions and time giving the COVID-19 as the reason.


Why this shareholders’ meeting drew attention was because of the land fraud incident in 2017 where Sekisui House was defrauded by a fraudulent landlord group of 5.5 billion yen over a transaction of land in Shinagawa-ku, Tokyo.  An internal Investigation Report that investigated this incident pointed out that multiple warnings had been given to the legal department of Sekisui House before the Company went into contract with the fraudulent group, and that Abe should be heavily responsible for the incident.


However, the truth of the incident was not made clear.  In January 2018, the then chairman, Isami Wada, pursued the management responsibility of the then president Abe, but instead he was dismissed.


The old inn site Sekisui House pursued to purchase = May 28, 2020, Shinagawa-ku, Tokyo

  • What was the outcome?


After that, a shareholder representative lawsuit against Abe et al. was filed, but the truth remained unclear.  In February of this year, Wada and Fumiyasu Suguro, a director and senior managing officer who cooperated with Wada, made a shareholder proposal calling for the replacement of 11 directors who did not clarify the incident.  Wada brought together candidates for directors, and at the shareholders' meeting held in April this year, he confronted the management team.


Then, at the shareholders’ meeting, Abe confronted the shareholders with "reinforcement" when he faced "no confidence in the chairperson."  "I would like to fulfill my role as chairperson.  Those who agree, please applaud."  When he called out like that, applause came from the entire room.  Abe immediately said, "A majority of the shareholders have agreed.  The motion has been rejected."


However, one of the shareholders who was watching it on a monitor in a separate room felt something was wrong.  Shortly before the shareholders’ meeting the meeting venue was changed to a very small place for about 50 people due to COVID-19.  Shareholders who could not enter the venue were guided to another room.  "Is it okay to say that they had a majority vote with the applause by a very limited number of shareholders?"  A Sekisui House employee also said, "The venue was occupied by Sekisui House employees and other related people.  Maybe that helped the meeting proceedings."


Suguro, the then incumbent director who made the shareholder proposal in cooperation with Wada, was not seated along with the company management, but sat in one of the seats for shareholders since he was there as a shareholder rather than a company director, and made a request to Abe as follows. "Please have a dialogue with us shareholders."


However, Abe often turned back and answered various questions after consulting with the clerical staff sitting behind him.  One frustrated shareholder told Abe, "You should speak in your own words."


Shareholders were frustrated, but the Company's slate directors were elected with a majority vote, and the shareholder proposal was rejected.  The largest approval rate for a dissident slate director was c.30%, with Wada and Suguro each gaining only 6%.  It was a complete defeat.


  • ”Olympus 2.0”


“Sekisui House was engaged with an improper transaction, and is covering up its Investigation Report.”


In February of this year, Wada, in cooperation with Suguro who was the secretary general when Wada was the president, announced a shareholder proposal for management reform at Sekisui House.  However, it was two and a half years ago that Sekisui House was involved in a huge fraud over a land transaction.  Why did Wada take action at this timing?


In March 2018, Wada failed to dismiss chairman Abe (then the president), and instead, he was dismissed.  Wada was introduced by an acquaintance and met Mr. Makoto Saito, a lawyer who is familiar with corporate governance.  Wada was not sure if it was a good thing for Abe to stay in power despite the fact that the Human Resources and Compensation Advisory Committee proposed to dismiss Abe, and Wada wanted to have expert opinions.


Saito explained to Wada that "Sekisui House should have had a rationale to overturn the Human Resources and Compensation Advisory Committee’s proposal, and criticized Sekisui House that information related to the land fraud had not been disclosed.  In late March 2018, the two visited the Financial Services Agency and the Japan Exchange Self-Regulatory Corporation and told them that "the shareholders' investment decisions were misguided due to inappropriate disclosures."  Although Abe and Vice Chairman Shiro Inagaki were reelected as directors at the April 2018 general meeting of shareholders, a shareholder representative lawsuit against Abe was filed in June 2018.


In the summer of 2019, Wada met with lawyer William W. Uchimoto.  Uchimoto used to be a legal counsel at the Philadelphia Stock Exchange and is well versed in the U.S. securities industry.  Uchimoto compared Sekisui House to Olympus, a major precision equipment company where a former president, who once accused accounting fraud, was dismissed.  Uchimoto's grandfather, like Wada, was originally from Wakayama prefecture, and the two liked each other.  Wada, who visited the U.S. in the fall of 2019, was introduced by Uchimoto to Christopher Douglas Brady, an executive at a U.S. investment company and the son of a former Treasurer.


Mr. Brady was interested in the Japanese market, and regarding the Sekisui House issue he said, "In the United States, covering up important information at a listed company is a crime." "In the United States, you could use a shareholder proposal to improve corporate governance."


  • Shareholder proposal “good chance of winning”


A new option “shareholder proposal” has emerged.  However, Wada was reluctant.  "The general meeting of shareholders in 2018 approved the current management team.  In Japan there is a saying which goes, "Once reelected, you have been wiped clean."  "If I make a shareholder proposal, people will see it as my "private revenge" or "vengeance", which makes it difficult for people to see the essence of the problem.”


However, Wada came to think differently as the year 2020 began.  "The management has been having its own way in everything, and the morale of employees has dropped significantly."  "An outside director criticized the magazine that discussed the Investigation Report at a board meeting saying "why are they talking about such an old stuff?"  Wada developed a sense of mission as he learned more.  "I need to rescue Sekisui House employees."  There was also a request from Suguro, who struggled alone at board meetings.  This led them to the “shareholder proposal.”


On February 17 this year, Wada et al. announced a shareholder proposal seeking to replace all the directors of the Company other than Suguro.  Immediately after that, he started asking support from major shareholders such as domestic and overseas institutional investors.  What he argued was the need for improved "governance" that surfaced in the land fraud case.  He also set the goal of clarifying the truth of the case.


One of the reasons why Wada entered into a battle with the management team was the 2019 general shareholders' meeting of the housing equipment giant LIXIL Group.  The former CEO, who retired amidst unclear personnel changes, made a shareholder proposal to elect his proposed directors for improved governance and returned to the leadership.  Wada said, “Sekisui House has a bigger governance issue than LIXIL, so we have a better chance of winning.”


On the other hand, however, he became aware of two things -- the difficulty of having shareholders understand the issue of “governance” and his “strategic failure”.


Sekisui House and other companies that hold shares with each other have had a slow reaction.  Some companies even refused to listen to what Wada had to say about the shareholder proposal, saying, "Our voting decisions have already been made."  Although Abe and his team’s responsibilities had not been clarified for the land fraud case and information had been insufficiently disclosed, some shareholders did not regard it as an issue of governance.


  • Why did they lose?


Then he hoped that overseas investors, who have a certain level of understanding of governance, will agree with him.  However, there were hurdles there as well.  While gaining support, he was asked, "Should all the directors be replaced?" "Can the dissident slate directors run the Company?"  Even overseas, where shareholder proposals are much more common, there are not many proposals that seek to replace entire board members.  Even if replacing entire board is okay, some overseas investors were also concerned about continuity of business.


Wada analyzes that one of the reasons why he failed was that he sought to replace the entire board.  “It would have been quite different if we had sought to replace only three including Abe, and to send in outside directors.  It was a strategic failure.”


A source around Wada gives one more reason for the failure.  "Shareholders liked stable business performance and dividends rather than governance." "The COVID-19 created a psychology that would like to see stability due to social unrest."


One of Sekisui House’s former executives considers that "the cause of defeat is not the strategy but Mr. Wada himself".  Wada was the first president whose entire career was at Sekisui House.  He reigned in the post of the president and chairman for a total of 20 years, and nobody could disagree with Wada.  This contributed to the fact that Wada was dismissed by Abe and his colleagues.  "Wada’s argument on governance should not have been convincing to many executives and shareholders."


The shareholder proposal was a complete defeat due to a mix of some complicated conditions. However, Sekisui House has not yet clarified the truth of the land fraud case, and the governance issue is not yet over.

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