Asset Value Investors Raises Concerns Over Corporate Governance and Directors' Credibility at Digital Garage
Asset Value Investors (AVI) has expressed concerns regarding corporate governance at Digital Garage (4819:JP) and has announced its intention to vote against the re-election of directors at the next Annual General Meeting (AGM). AVI, a shareholder since 2018 with a 3% vote, has engaged with the board privately through presentations and letters to encourage governance and structural reforms. The company's medium-term management plan, released in May 2023, failed to introduce new measures and did not provide a convincing growth strategy. This announcement resulted in a 39% decrease in share price, causing a loss of JPY 90 billion in shareholder value.
Key Issues Ignored
AVI has highlighted several key issues that Digital Garage has overlooked. These include addressing poor performance and share price weakness, reducing capital invested in Kakaku.com (2371:JP), and resolving concerns over the quality of the Board of Directors.
Underperformance and Share Price
Over the past five years, Digital Garage has underperformed compared to its peer GMO Payment Gateway (GMO, 3679:JP). GMO has shown higher average annual growth rates in transaction volume and profit. Digital Garage's share price has also underperformed, with a five-year return of just 1.6% compared to GMO's 9.2% and the TOPIX's 54.7%.
Concerns Over Board of Directors
AVI has raised concerns about the composition of the Board of Directors at Digital Garage. Three of the six outside directors have been with the company for over 10 years, potentially compromising their impartiality. Additionally, conflicts of interest exist for two outside directors, Hiromi Ozaki and Makoto Sakai, which may undermine their ability to effectively monitor and supervise the company.
In conclusion, AVI believes that Digital Garage's poor performance, lack of a convincing growth strategy, and governance issues have led to the company trading below its intrinsic value. AVI intends to vote against the board directors at the next AGM unless significant changes are made. The company encourages other shareholders who share their concerns to do the same.
Implications of Corporate Governance Concerns for New Businesses
The concerns raised by Asset Value Investors (AVI) over Digital Garage's corporate governance and directors' credibility underscore the importance of robust governance structures for new businesses. AVI's decision to vote against the re-election of directors at the next AGM highlights the potential consequences of poor performance, weak growth strategies, and governance issues. For a new business, this serves as a crucial reminder of the need for strong leadership, clear growth strategies, and transparent governance.
Performance and Growth Strategy
Digital Garage's underperformance compared to its peer, GMO Payment Gateway, and its lack of a convincing growth strategy resulted in a significant decrease in share price. This demonstrates the importance of performance tracking and strategic planning for new businesses. A clear, convincing growth strategy can help attract and retain investors, while poor performance can lead to a loss of shareholder value.
Board Composition and Governance
AVI's concerns about the composition of Digital Garage's Board of Directors and potential conflicts of interest emphasize the need for impartiality and effective supervision in a company's leadership. For new businesses, this highlights the importance of carefully selecting board members and ensuring they can effectively monitor and supervise the company without conflicts of interest.
In conclusion, the issues raised by AVI serve as valuable lessons for new businesses. Strong performance, a convincing growth strategy, and robust governance are critical for attracting and retaining investors and maintaining shareholder value.
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