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Limitations of the "Third Party Committee" Revealed – LIXIL and Sekisui House.  Unbiased Investigation cannot be expected.


March 17, 2020

Business Insider

Ryohei Yuki

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There is a website called “SaveSekisuiHouse.”


At the LIXIL Group's general meeting of shareholders in 2019 where company-proposed slate directors and shareholders-proposed slate directors fought over board seats, the shareholders launched a website called “savelixil” (no longer live) where they sent the stakeholders messages on what the slate directors are thinking and what inconsistencies there are in the company's arguments.  "SaveSekisuiHouse" is a similar one.


Its primary content is the Investigation Report.


The Investigation Report that Sekisui House did not disclose


Sekisui House lost 5.5 billion yen in 2017 in a fraud transaction that involved a piece of land in Nishi-Gotanda, Tokyo and a so-called fraudulent landlord group.


Since the trial of defendant Kaminsukas, who is considered to be the leader of the fraudulent group, is underway, you might recall the incident.


Disclosed on the "SaveSekisuiHouse" site is a report compiled by Sekisui House’s investigation committee that consisted of outside auditors and outside directors in connection with this incident.

Source: “SaveSekisuiHouse”

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In the LIXIL Group case there was a website called “savelixil” launched by the shareholders who presented a shareholder proposal seeking election of its proposed slate directors.

Why the Investigation Report is the site’s primary content is because it is something that Sekisui House has not yet made available to the public voluntarily.


In a shareholder representative lawsuit that has been filed by a shareholder over the land fraud case, the Osaka District Court requested Sekisui House to submit the Investigation Report, but Sekisui House refused.  Sekisui House immediately made an appeal, which was rejected by the Osaka High Court and then Sekisui House submitted the Report reluctantly.


The highlight of the redacted report, where many personal names are masked, is the details describing how they were deceived by the fraudulent group.  I would encourage you to take a look at the website as well as the Investigation Report, but there were a lot of chances during the transaction to realize that it was fraudulent.


More than 10 chances to realize….


According to the Investigation Report, the land was owned by a person named Sakiko Ebisawa, and one of her acquaintances called on Sekisui House to sell the land.  However, Ebisawa who showed up at the company was a fake owner (it is described as fake Ebisawa in the Report), and the real Ebisawa told the company that "the true landowner is myself, I never made a reservation for sale or made a temporary registration so I would request that the temporary registration be removed. "


So Sekisui House’s legal counsel and others advised the company to check to see if the person is the real Ebisawa by contacting her acquaintances, but it was never done.  The company brought forward the final settlement of the transaction by two months, and paid a large amount of money to the fraudulent group.


Maybe I should stop writing about this here, but an insider who knew Sekisui House at the time, said, "There were 10 or more chances for them to realize that it was a fraudulent transaction."

The Investigation Report that has not provided its answer to “Why”

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Redacted Investigation Report posted on SaveSekisuiHouse

Source: “SaveSekisuiHouse”


The Investigation Report has a number of vivid descriptions of what happened.  But that is not it.


The big mystery is, why a number of warnings were ignored, and the Investigation Report has not answered that question.


Why did they not verify Ebisawa’s identity while they were suggested to do so?  Why did they bring the final settlement date forward?  The Investigation Report has not provided its answers to these questions, and so I am not necessarily happy with it.


Sekisui House insiders say, the reason why the Investigation Report does not have the answers is “because the company suspended its investigation.”


Subsequent to the land fraud, Mr. Isami Wada, then Chairman, pursued to dismiss Mr. Toshinori Abe, current Chairman.  However, instead Mr. Wada was ousted.


The Investigation Report clearly states that Mr. Abe was involved in the transaction, but that there was no direct involvement by Mr. Wada.


Given all of these, the reason why the Investigation Report is not answering everybody’s question of why? may be because either the current management who had ousted Mr. Wada told the investigation committee members not to further investigate, or the members read what the current management was implying.


Third party committee - neutrality and independence doubtful


No wonder.  When a scandal occurs, a third party committee, composed of lawyers and others, is set up to investigate and then it proposes measures to prevent recurrence.  But it is up to the company to decide who to ask for the investigation and how much to pay them.  Therefore neutrality and independence become dubious.


The same thing happened at the LIXIL Group as “savelixil” was set up.


In October 2018, Yoichiro Ushioda, who is a founding family member of Tostem, one of the companies merged into the LIXIL Group, and yet acted like an owner of the LIXIL Group, forced Kinya Seto, then president and CEO, to resign.


Institutional investors who found the process extremely problematic from a viewpoint of corporate governance demanded an investigation from the company.  A third party committee was set up and an investigation report was produced, but the repot that the company first published was a summary of the report that extracted only those descriptions very convenient for the company.


When the institutional investors asked for the disclosure of the full-text report, it was unveiled that there were various problems in the process of Mr. Seto resigning from the company.  That was good, but the investigation committee’s conclusion on the resignation of Mr. Seto remained unchanged.  The shareholders who made a shareholder proposal criticized that it was the investigation in which the conclusion had been made in advance.

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Are third party committee members appointed by the company neutral?

At the LIXIL Group's meeting of shareholders, the shareholder proposal won a victory.


Former Supreme Court Justice Kaoru Onimaru, who was elected as an outside director, was said to have cited the reason why she had decided to run for election.


“Because I felt indignant after reading the poor investigation report.”


Need for an independent investigation committee that does not need to read what a company is implying


Is a third party committee really independent?  Some doubts are coming even from the legal community.


“You cannot expect a company-appointed third party committee to find out the truth.  You need to have an ‘independent committee’ totally independent from the company for stronger corporate governance.”


Says Takaaki Wakasugi, Professor Emeritus at the University of Tokyo and a pioneer in corporate governance research in Japan.


For Sekisui House’s general meeting of shareholders to be held in late April, a shareholder proposal was made on February 17, 2020 by Mr. Wada and others seeking election of directors including himself.  At the press conference held on that date, Mr. Wada criticized the company that does not voluntarily publish the Investigation Report, a redacted version of which can be viewed on SaveSekisuiHouse.


The company has not well responded to the shareholder proposal as of yet, but in order for them to survive the general meeting of shareholders, the company may publish the Investigation Report as a way to silence criticism.  However you might want to note that the Investigation Report, although it has some vivid descriptions, lacks material facts and the Investigation Report may not necessarily be neutral.

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