Governance For Yutaka Foods Corp

Conflict of interest between Yutaka and its parent Toyo Suisan

Toyo Suisan is the controlling shareholder of Yutaka and holds a large influence over Yutaka. This influence is clearly evident from the fact that both the current Chairman and President of Yutaka are former employees (and even a former board director) of Toyo Suisan. The strong influence has led to numerous areas for potential conflicts of interest between parent and subsidiary, such as:
 

a.     80% of revenues from parent 

Toyo Suisan is both the Yutaka’s largest customer and largest supplier, accounting for more than 80% of Yutaka’s revenue and around 80% of raw materials purchased.

b.     Loan of JPY5.5 billon to parent

There is JPY5.5bn corporate loan from Yutaka to Toyo Suisan had been in place for over 10 years and that Toyo Suisan no longer has any use of this loan, as its financial position is now very strong. There appears to be no strong reason to continue this loan as part of the “Cash Management System” of Toyo Suisan group, and if Yutaka does not receive an economic benefit that is higher than the cost of capital of Yutaka, the continuation of this loan could be interpreted as a breach of duty of diligence by the management of Yutaka.

c.      Cross shareholdings

Yutaka has a 9% stake in Semba Tohka Industries, which is a food manufacturer listed in Japan. Toyo Suisan has another 18% stake in Semba Tohka and accounts for Semba Tohka as an equity accounted associate. There appears to be no strategic business relationship between Yutaka and Semba Tohka and any business relationship, if any, is very small.

 

What Yutaka should do to improve corporate governance

As a listed subsidiary with potential inherent conflicts of interest, Yutaka should hold itself to a higher corporate governance standard. This is critical to protect minority shareholders and build up investor confidence. The following could potentially be done to improve corporate governance at Yutaka.

-    Explaining in detail how conflicts of interest are mitigated in relation to transactions with the parent company. Yutaka does not provide much discussion about transactions with its major shareholders, however this is clearly a very important area of concern for shareholders. As listed companies using the public infrastructure of the capital markets, management has a responsibility to provide a level explanation that is trusted by the market. 

-    Transition to Company with an Audit and Supervisory Committee
   As a listed subsidiary, Yutaka should hold itself to a higher corporate governance standard and put in place additional measures to reassure minority shareholders that they are treated fairly in relation to its parent company. This is critical to build up investor confidence

-    Appoint majority of Board of Directors as Independent Directors. Although Yukata satisfies the CGC principal that 1/3 of its board of directors composed of independent outside directors, we encourage the Company to engage in a board search for high-quality independent directors. A 50% ratio for independent directors is more sensible given the large influence that Toyo Suisan holds as controlling shareholder, and the many areas of potential conflict of interest.

-    Unwinding of this cross-holding stake as that there is no strategic business relationship between Yutaka and Semba Tohka and any business relationship, if any, is very small.

-    Return the loan to Yutaka and distributed to shareholders as a special dividend as the loan could be seen as giving Toyo Suisan preferential access over Yutaka’s cash balance and be interpreted negatively by the market.