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METRICAL: CG Stock Performance (Japan): September 2024

September stock market was seen as a back-and-forth market, but a sell-off prevailed on the last trading day of the month, as investors were cautious about sooner-than-expected interest rates hike due to the launch of the new Ishiba administration.
In September, the CG Top 20 stock market outperformed both TOPIX and JPX400 for the fifth consecutive month.

The Japanese stock market, which had fallen until the middle of the month on fears of an early BOJ rate hike, recovered from the optimistic mood toward the end of the month, buoyed by the U.S. stock stocks rally and weaker yen, triggered by a large rate cut by the U.S. Fed. Later, the Japanese stocks fell back as sell-offs were triggered by the new Ishiba administration and the yen’s appreciation on the back of fears of an early rise in interest rates.

METRICAL:Engagement Keeps Widening the Profitability Gap Between the Top and Bottom Companies in Market Cap

I have discussed several times in my previous articles the widening gap between companies with large and small market capitalizations in terms of profitability and corporate governance initiatives. In this article, I would like to examine this issue. In my previous articles, “Increasing Profitability to Gain Support from Overseas Investors Is a Condition for Higher Valuation” and “Why Are Companies with High Corporate Governance Practices Ratings More Profitable?”, I stated that companies with high foreign ownership tend to have larger market capitalization and higher profitability. In addition, these companies also tend to have superior corporate governance practices. This is due to the fact that the companies have improved their profitability and corporate governance practices through years of engagement with overseas investors. Overseas investors have been calling for the need to improve the board of directors and the effective use of cash flow and cash on hand, including cash allocation, in order to increase corporate value. Based on our analysis to date, it appears that management is aware of the 30% foreign shareholding level as a threshold. Once this level is reached, there is a marked tendency to be forced to incorporate the opinions of overseas investors. It is expected that the engagement of overseas investors as a driver will further enhance the profitability and corporate governance of their portfolio companies (which tend to have large market capitalization). Thus, it can be inferred that the gap between companies with large market capitalization and those without will widen more and more.

Japan’s “Asset Owner Principles”: A Step Forward, But More is Needed

(Translation-) I support Japan’s new Asset Owner Principles, but am a little disappointed that they are weak. It seems clear that one of the major purposes is to urge asset owners to sign the Stewardship Code (SC), which they should be doing already. But even that request is weak: “When fulfilling stewardship responsibilities, asset owners should consider accepting Japan’s Stewardship Code and then take actions in accordance with the Code, based on the size of their AUM and capabilities.” I would have hoped for stronger language, at least for pension funds. (Something have been suggesting since 2016. See below.)

And even though the Principles are not binding and do not more strongly ask asset owners to sign the Stewardship Code, they do not mention or clarify that overseeing their fund managers’ voting activities is one of their responsibilities, included in their fiduciary duties.

METRICAL:Why Are Companies with High Corporate Governance Practices Ratings More Profitable?

In this article, I would like to discuss what trends are seen in companies with high corporate governance practice evaluations and what relationship there is between corporate governance practices and profitability and valuations of the companies.

Since February 2018, Metrical has evaluated a universe of approximately 1,800 companies using more than 40 evaluation criteria based on publicly available information such as annual securities reports, corporate governance reports, and financial statements, etc. which are updated on a monthly basis. Metrical also divides its corporate governance analysis into Board Practices and Key Actions. This is based on the hypothesis that for value creation, which is the goal of company management, improvements not only in board practices but also in board practices lead to decisions and actions (key actions), which in turn contribute to value creation. In other words, even if the composition of the board of directors and other aspects of board practices are formally put in place, they may not be utilized in management to create value. I believe that improvement of board practices should lead to actual actions and create value, which is what corporate governance improvement should be about. Below I discuss the relationship between the Metrical CG Score, which is evaluated based on this idea, and the companies’ profitability and valuations.

METRICAL: CG Stock Performance (Japan)-August 2024

After a sharp downturn at the beginning of the month, the August stock market gradually calmed down and recovered much of the decline by the end of the month.
In August, the CG Top 20 stock market outperformed both TOPIX and JPX400 for the fourth consecutive month.

The stock market in August, which started following the 0.25% interest rate hike decided at the Bank of Japan’s July monetary policy meeting, fell sharply in confusion from the unwinding of the yen carry trade due to the significantly rising Japanese yen. Thereafter, the yen gradually regained its stability, and the US equity market was strong after passing key events such as Fed Chair Jerome Powell’s speech at Jackson Hole and Nuvidea financial results, which led to a buy-back Japanese stocks rally.
The TOPIX and JPX400 indexes fell 1.96% and 1.23%, respectively, in May, while the CG Top 20 index outperformed significantly both indices up by 2.89%.

The composites of CG Top 20 stocks has been replaced as of July 1.
The CG Top 20 has been revised as of July 1. EBARA CORPORATION (6361), TechnoPro Holdings (6028), ENEOS Holdings (5020), INNOTEC (9880), United Arrows (7606), and Persol Holdings (2181) were newly added to the list, while H.U. Group Holdings (2146), Kao Corporation (4452), Kao (4452), Wacom (6727), K’s Holdings Eisai (8282), and Trend Micro (4704) were removed. (2146), Kao (4452), Wacom (6727), K’s Holdings (8282) Eisai (4523), and Trend Micro (4704) were removed. Details of the component stocks are shown in the table below.

What Needs to be Added to the “Action Program for Accelerating Corporate Governance Reform: From Form to Substance”

Nicholas Benes
Representative Director, The Board Director Training Institute of Japan (BDTI)
(The following is my personal opinion and not that of any organization. This is a translation of the original article.)

As sent to prospective candidates to be the next Prime Minister, in no particular order:
Chief Cabinet Secretary Yoshimasa Hayashi, Minister for Foreign Affairs Yoko Kamikawa, Minister of Economy, Trade and Industry Ken Saito, Minister for Digital Transformation Taro Kono, Minister in Charge of Economic Security Sanae Takaichi, Secretary-General of the Liberal Democratic Party Toshimitsu Motegi, House of Representatives Member Shigeru Ishiba, House of Representatives Member Shinjiro Koizumi, House of Representatives Member Takayuki Kobayashi, House of Representatives Member Seiko Noda, House of Representatives Member Katsunobu Kato.

CC: Prime Minister Fumio Kishida, Deputy Chairman of the Liberal Democratic Party’s Political Research Committee Masahiko Shibayama, Parliamentary Vice-Minister of Health, Labor and Welfare of the Liberal Democratic Party Akihisa Shiozaki, Deputy Secretary-General of the Liberal Democratic Party Seiji Kihara, House of Representatives Member Kenji Nakanishi.

Japan’s Corporate Governance Code (CGC) and the investor Stewardship Code need to function as “two wheels” of a cart. I had advocated this since 2013, and when I had the opportunity to formally propose the establishment of the CGC to the Liberal Democratic Party in 2014[1], I insisted that the most important thing was to “promote the disclosure of information that enables one to verify governance structure and substance” at firms.

“Governance and oversight are more likely to function effectively on a board that has a majority of truly independent and qualified independent directors.” As of 2014, this dynamic had been recognized in many countries around the world. At the time, I thought that if companies disclosed their actual governance practices and stewardship by investors started functioning well, Japan, as a developed country, would naturally adopt a similar stance within the next five years or so.

Ten years later, however, there is still no serious discussion of these two issues in Japan. Now that global investors are paying more attention to the Japanese stock market, I believe it is time for us to confront these core issues and take the following steps to speed up Japan’s governance transformation.

Oasis & BDTI’s “Director Training for Women Initiative 2024” Recruitment Results

For the third consecutive year, Oasis Management Co. (“Oasis”), graciously sponsored scholarships in support of outstanding women who would go on to receive training from The Board Director Training Institute of Japan (“BDTI”). Between April 1, 2024 and June 30, 2024, Oasis covered the full cost of training for women with outstanding qualities who participated in one of BDTI’s director training courses.

With many applications from talented women, 91 women were selected to receive scholarships this year. More than half of the scholarship recipients took BDTI’s Governance “Juku”, BDTI’s core director training taught in Japanese, while the rest participated in either Advanced Outside Director Training, BDTI’s Director Boot Camp taught in English, BDTI’s Role Play course, or went through e-Learning (which consists of 4 digital courses in total).

【METRICAL】Increasing Profitability to Gain Support from Overseas Investors Is a Condition for Higher Valuation

In this article, I would like to try to summarize the recent analysis in this paper.

Metrical Analysis
We began analyzing corporate governance of Japanese companies in full swing in June 2015, covering 500 companies at that time. Since then, from February 2018 to the present, I have analyzed approximately 1,800 companies. These 1,800 companies are used as the universe and are updated monthly based on publicly available information such as annual securities reports, corporate governance reports, and financial statements. Metrical’s corporate governance analysis is divided into Board Practices and Key Actions. This is because even if the board structure and other board practices are formally in place, it is skeptical that they are being used to manage the company to create value. This is based on the hypothesis that, ideally, improvements in corporate governance will lead directly to value creation, or that improvements in board practices will create value through key actions such as cash allocation, share repurchases/reirements, etc. Therefore, I believe that key actions should be added to corporate governance evaluations.

METRICAL: CG Stock Performance (Japan): July 2024

In July, the stock market was highly volatile, rising sharply at the beginning of the month, then falling sharply toward the end of the month, before recovering at the end of the month. In July, the CG Top 20 significantly outperformed the TOPIX and JPX400 for the third consecutive month. The July stock market, which […]

METRICAL: Improved Profitability to Attract Overseas Investors Key to Raise Valuation Even After TSE’s Request

One year has passed since the TSE requested a P/B increase at the end of March 2023 (“Request for action to achieve cost of capital and stock price conscious management”). Valuations are expected to increase as stock prices rise. In this analysis, I examined what trends were observed in the companies that increased their Tobin’s Q in the Metrical universe during the period from March 2023 to March 2024.

In the comparable Metrical universe of 1,750 companies from March 2023 to March 2024, the analysis is divided into 5 groups (>50% increase, >25% to <50% increase, >0% to <25% increase, no change, and decrease) for each item in terms of the percentage change in Tobin's Q. The median percent change in Tobin's Q during this period was 2.06%. The table below profiles the 1,750 companies in the Metrical universe, dividing them into five groups (>50% increase, >25% to <50% increase, >0% to <25% increase, no change, and decrease) by the percentage change in Tobin's Q over the one-year period from March 2023 to March 2024. We can see that companies whose Tobin's Q increased by more than 50% include those with high Tobin's Q, average ROE and ROA over the past three years, and foreign shareholding ratios. Although companies whose Tobin's Q rose by more than 50% in terms of market capitalization gave up the top spot to companies whose Tobin's Q rose by more than 25% but less than 50%, the relatively large market capitalization of these companies caused their Tobin's Q to rise. The companies whose Tobin's Q increased by more than 50% and by more than 25% but less than 50% continued to increase their ROE and ROA.

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