Corporate governance issues surrounding the independence and conflict of interest within the board in Japan Land surfaced in 2009, following the successive resignations of its Deputy Managing Director, Chief financial officer, external auditor, and an independent director. Following there violations of these corporate governance issues, the company's share price fell from $0.37 in July to close at an all-time low of $0.27 at the end of November. On 30 March 2010, Japan Land suspended the trading of shares1 in the face of financial woes affecting one of its subsidiaries,Jurong Data Centre Development (JDD). By the end of June 2011, JapanLand was delisted from the Singapore Exchange. The objective of this case is to allow a discussion of issues such as board composition and director independence, resignations of independent directors, auditors, and key officers, and whether they are "red flags," internal control and risk management, conflicts of interest, and ethics.

Company Overview

Japan Land Limited was incorporated on 28 October 1997 as a business-to-business (B2B) company and was listed on the Singapore Exchange(SGX) Mainboard in 2000. In 2004, Japan Land added the real estate and related sector to the Group's core business, with an emphasis on the Japanese property market. Through its subsidiaries and associated companies, Japan Land's businesses spanned property development,project management, and customized housing in Japan, Singapore, and Vietnam. The company's three main areas of investment are developmentProjects for both commercial and industrial purposes, corporate capital investments (which also includes investing in the provision of human resources and technical/management know-how), and provision of management services, including cash flow management, procurement,development, and operations.

Group Structure

The many key subsidiaries that Japan Land has for development and investment purposes are held through Japan Asia Land Limited (JALL),a wholly-owned subsidiary of Japan Land, which was incorporated in Japan. JALL is an investment holding company that owns 50 percent of Lux Partners Co. Ltd. (Lux Partners), 75.5 per cent of Japanese (Vietnam) Company Ltd (JAVCO), 83.33 per cent of Jurong Data Centre Development PVT Ltd (JDD), and 20 per cent of Katsumi Housing Corporation Limited (KHC). It oversees the operations of these companies and plays a central role in promoting development projects in Japan,in addition to providing advisory services on corporate revitalization programmers and underscoring Japan Land's focus on becoming a leading real estate player.

Initially focused on customized housing and real estate development through its associate KHC Limited, Japan Land ventured into developing and managing data centers in Asia. Following the success of one of its largest data center projects in Tokyo, the Group went on to develop a data center, JDD, in Singapore to strengthen its position in the data center segment. It planned to participate in more of such projects in the region.

Board of Directors

Japan Land's board was made up of seven members, five of who mare non-executive directors. Of the five non-executive directors, the company considered three as independent directors, whose status was reviewed annually by the nominating committee. The board consisted of directors with diverse experience and backgrounds, with a majority holding business and management or accountancy degrees from reputable universities. The board was chaired by Tetsuo Yamashita, who was also the founder and Chairman of Japan Asia Holdings Limited. Yamashita had over 25 years of broad and in-depth experience in the financial industry and had held roles with Japan's Ministry of Finance and NomuraSecurities Co. Ltd.The board of JALL was chaired by the Managing Director of JapanLand, Mitsutoshi Ono, since 2005. Junya Kitada was the ExecutiveDirector-cum-Chief Financial Officer of JALL, as well as the principal of 'Accounting Factory,' the accounting firm which has been providing accounting services to JALL for an undisclosed number of years.

Remuneration Policy

The board of directors in Japan Land was compensated in the form of basic director's fees, committee, attendance fees, and share options.The director's fee policy was based on a scale of fees divided into basic retainer fees as director and additional fees for attendance and serving on specialised committees.Executive directors did not receive director fees and instead received a mix of salary, allowances, bonuses, and share options. The proposed director's fee for 2009 was S$279,686,which covered a period of 14 months4. In 2010, the proposed fee wasS$304 0745.

The company had a 2000 Japan Land Limited Share Option Scheme("2000 scheme"), which was approved and implemented in 2000. This scheme granted stock options to employees of the Group and both executive and non-executive directors of the company. In the case where the directors receiving options are controlling shareholders or associates of the company, it required the approval of shareholders in the general meeting.

Audit and Nominating Committees

As at the end of its 2009 financial year, Japan Land's audit committee(AC) comprised two non-executive independent directors, including the chairman of the AC. Members of the AC had a background in accounting and finance, and AC meetings were typically held several times during the financial year. According to the company's corporate governance report, the AC reviewed a wide range of reports and relevant papers from the management and external auditors. Management staff and the company's auditors, who could provide additional insight into the matters to be discussed, were also invited from time to time to attend such meetings.

Japan Land's nominating committee (NC) comprised two non-executive independent directors, including the chairman of the NC and one executive director. NC meetings were held at least once a year. They made recommendations to the board for the re-election of directors and the appointment of potential candidates as directors and members of the committees and evaluated the performance of the board.

 

Issues within the GroupReview and oversight of the accounting practices

One of the issues faced by both the JALL's and Japan Land's boards was the review and oversight of the accounting practices of the company.Junya Kitada and the JALL board would draw up the accounts, which would then be approved by the staff of Accounting Factory. MitsutoshiOno also set up an audit committee authorising Kitada as an internal auditor to perform audits on JALL and its subsidiaries without notifying the AC of Japan Land.

Lack of proper monitoring and reporting of subsidiaries

In September 2009, Ernst & Young, Japan Land's auditor since2000, raised the issue of lack of timely communication and sharing of information between the finance department of the head office and the with regard to its subsidiaries, particularly JALL7. The issue of the lack of accounting knowledge and compliance from overseas reporting entities was raised.

Investment proposals by JALL in Fuchu in Japan and JDD in Singapore and Vietnam were not presented to the Japan Land board for evaluation and approval. In addition, the budget report of the Vietnam project did not include proper detailed budgeting and projections, and there were not timely cashflows and project reporting by JALL to its parent. Further,an intercompany loan of S$10 million was taken to finance the Fuchu DataCentre, which matured in May 20098, was signed and extended to 2011 byMitsutoshi Ono on behalf of Japan Land and JALL's Executive Director,Yoko Yamashita, without notifying the Japan Land board. Proceeds received from the Data Centre were also not utilised for the repayment of the S$10 million loans. In June 2009, JALL issued JPY700 million worth of bonds to Aizawa (a related party to Japan Land) using Japan Land'sinvestments as its security, which was also not presented to the board ofJapan Land.

Resignation of Management Committee and External Auditor

Successive resignations of members of the Japan Land ManagementCommittee unfolded in July 2009, with the resignation of its DeputyManaging Director, Junichiro Meno9. Subsequently, in August, the chief financial officer of Japan Land, Tan Boon Hua, submitted his resignation to the board10, which took effect on 1 September 2009. Both parties cited personal reasons for their departure from the company.

On 2 October 2009, Ernst & Young gave notice to the company of its intention to resign as the company's auditor, just three days after its appointment in the company's Annual General Meeting. However, in a news announcement dated 14 October, Japan Land said the reason for the change in auditor was to improve the corporate governance of the company. KPMG LLP was then appointed to be the external auditor of Japan Land Limited.In November 2009, Sin Boon Ann resigned as Japan Land's independent director, barely completing a one-year term on the board. In a regulatory announcement, Sin Boon Ann said he was dissatisfied with the company management control over its operating subsidiary, JALL. Edward TiongYung Suh, who had over 11 years of experience in civil and commercial litigation, banking litigation, insolvency, and restructuring as well as property disputes, was eventually nominated to the board as the newly independent and non-executive director on 11 January 2010. He was also appointed as a member of the AC.

In late November, Junya Kitada resigned from JALL16. Mitsutoshi Ono also resigned as Japan Land's Director and Managing Director but remained as President of JALL17. In December 2009, Leow Tet Sin was appointed as the new Managing Director of Japan Land.

Japan Land then acknowledged the existence of several conflicts of interests, including the conflict posed by the duality of roles held byMitsushito Ono and the inadequacy of control over JALL. It also admitted to the lack of prompt disclosure of project cashflows from JALL .18 In June2010, Ono also stepped down as President of JALL.

Delisting of Japan Land Shares

Problems continued to surface in Japan Land, despite its bid to manage and improve the corporate governance of the company. During the period from July to November 2009, the share price of Japan Land fluctuatedunsteadily. By the end of November, it had fallen by about 25 per cent from S$0.36 to S$0.27. Its share price remained unstable, and on 30March 2010, trading in its shares was suspended on SGX at the request of the company, after closing at an all-time low of S$0.26.Japan Land was on track to sell an 85 per cent stake in JDD to connected Planet Holding Limited (Connected Planet). However, the latter repeatedly failed to complete its investment agreement. This led to Japan Land being unable to use the proceeds to pay its debt of aboutS$44.4 million owed to the main contractor, M+W Singapore Pte Ltd.

On 31 March 2010, Japan Land issued a profit warning, saying it expected to post full-year losses for its financial year ending 31 May 2010 due mainly to losses in its underlying businesses. It reported a full-year net loss of S$65.7 million for the year ended 2010 due to the writing-off of loan and interest receivables from the liquidation of JDD and higher finance expenses related to financial restructuring.

To resume the trading of the company's shares, Japan Land was to submit a proposal by 29 March 2011, failing which SGX would have the option to delist the company. On 25 May 2011, Japan Land's application for time extension in the Preliminary Resumption Proposal submission was rejected by SGX. Among the reasons cited, SGX said it was uncertain ofJapan Land's ability to meet the continuing listing requirements due to the negative working capital and poor operating cash flow position for the financial years ended 31 January 2010 and 31 January 2011.

As of April 2010, the outstanding sum that Japan Land owed to the main contractor, M+W Singapore, amounted to S$200 million. The company kept its negotiations with M+W Singapore Pte Ltd going until a decision was reached to wind up JDD. Due to the troubled financial standing of Japan Land, JDD was eventually sold to M+W Singapore on 15November 2010 for S$145 million.Japan Land was notified by SGX that its shares would be delisted with effect from 30 June 2011. Japan Land then became an unlisted public limited company with its existing shareholders still holding shares in the company.

Questions

What are the key corporate governance issues raised in the JapanLand case? What are the major underlying causes of these issues?

2. Explain the key potential conflicts of interest highlighted in the case and explain why they undermine corporate governance in the company.

3. There was a succession of resignations from the company. To what extent did these resignations indicate systemic corporate governance issues within the company?

4. Do you think the independent director should have resigned? Under what circumstances should a director resign, and how should communicate this decision?

5. Do you think the company and the external auditors acted appropriately when the external auditors resigned just three days after accepting-appointment?

6. In your opinion, were the financial woes faced by the company caused by its corporate governance problems?

7. Recently, there was a major scandal involving Olympus, a large Japanese listed company. Do you believe that there are certain cultural or business norms involving Japanese companies which may pose systemic corporate governance issues in Japanese companies?